Annual Report 2015 Key Figures I 06

Annual Report 2015 Key figures I 06

2015 + / – 2014 2013 2012 1 2011 previous Figures in EUR million year Results Gross written premium 17,068.7 +18.8% 14,361.8 13,963.4 13,774.2 12,096.1 Net premium earned 14,593.0 +17.5% 12,423.1 12,226.7 12,279.2 10,751.5 Net underwriting result 93.8 (23.6) (83.0) (96.9) (535.8) Net investment income 1,665.1 +13.1% 1,471.8 1,411.8 1,655.7 1,384.0 Operating profit (EBIT) 1,755.2 +19.7% 1,466.4 1,229.1 1,393.9 841.4 Group net income 1,150.7 +16.7% 985.6 895.5 849.6 606.0

Balance sheet Policyholders´ surplus 10,267.3 +0.3% 10,239.5 8,767.9 8,947.2 7,338.2 Equity attributable to shareholders of Hannover Rück SE 8,068.3 +6.9% 7,550.8 5,888.4 6,032.5 4,970.6 Non-controlling interests 709.1 +1.0% 702.2 641.6 681.7 636.0 Hybrid capital 1,489.9 -25.0% 1,986.5 2,237.8 2,233.0 1,731.6 Investments (excl. funds withheld by ceding companies) 39,346.9 +8.6% 36,228.0 31,875.2 31,874.4 28,341.2 Total assets 63,214.9 +4.6% 60,457.6 53,915.5 54,811.7 49,867.0

Share Earnings per share (basic and diluted) in EUR 9.54 +16.7% 8.17 7.43 7.04 5.02 Book value per share in EUR 66.90 +6.9% 62.61 48.83 50.02 41.22 Dividend 572.8 2 +11.8% 512.5 361.8 361.8 253.3 Dividend per share in EUR 3.25 + 1.50 2, 3 +11.8% 3.00 + 1.25 3 3.00 2.60 + 0.40 3 2.10 Share price at year-end in EUR 105.65 +40.9% 74.97 62.38 58.96 38.325 Market capitalisation at year-end 12,741.1 +40.9% 9,041.2 7,522.8 7,110.4 4,621.9

Ratios Combined ratio (property and casualty reinsurance) 4 94.4% 94.7% 94.9% 95.8% 104.3% Large losses as percentage of net premium earned (property and casualty reinsurance) 5 7.1% 6.1% 8.4% 7.0% 16.5% Retention 87.0% 87.6% 89.0% 89.8% 91.2% Return on investment (excl. funds withheld by ceding companies) 6 3.5% 3.3% 3.4% 4.1% 4.1% EBIT margin 7 12.0% 11.8% 10.1% 11.4% 7.8% Return on equity (after tax) 14.7% 14.7% 15.0% 15.4% 12.8%

1 Adjusted pursuant to IAS 8 2 Proposed dividend 3 Dividend of EUR 3.25 plus special dividend of EUR 1.50 for 2015, EUR 3.00 plus special dividend of EUR 1.25 for 2014 and EUR 2.60 plus special dividend of EUR 0.40 for 2012 4 Including expenses on funds withheld and contract deposits 5 Hannover Re Group’s net share for natural catastrophes and other major losses in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross) 6 Excluding effects from ModCo derivatives and inflation swaps 7 Operating result (EBIT) / net premium earned The Group worldwide I 07

A complete list of our shareholdings is provided on page 160 et seq. of the notes. The addresses of the Hannover Re Group’s branch offices and subsidiaries abroad are to be found in the section “Further information” on page 242 et seq.

Strategic business groups I 08

Hannover Re Group

Property & Casualty reinsurance Life & Health reinsurance

Target Markets Financial Solutions • North America • Continental Europe Risk Solutions • Longevity Specialty Lines Worldwide • Mortality • Marine • Morbidity • Aviation • Credit, Surety and Political Risks • United Kingdom, Ireland, London Market and Direct Business • Facultative Reinsurance

Global Reinsurance • Worldwide Treaty Reinsurance • Catastrophe XL (Cat XL) • Structured Reinsurance and Insurance-Linked Securities An overview

Gross premium I 01 * in EUR million

2000020,000 17,068.7 13,774.2 13,963.4 14,361.8 1500015,000 12,096.1 10,274.8 11,428.7 9,289.3 8,258.9 1000010,000 8,120.9

50005,000

00 2006 2007 2008 2009 2010 2011 2012 1 2013 2014 2015

Group net income (loss) I 02 * in EUR million

1,150.7 12001,200 985.6 849.6 895.5 10001,000 721.7 733.7 748.9 606.0 800800 514.4 600600 400400 200200 (127.0) 00 -200(200) 2006 2007 2008 2009 2010 2011 2012 1 2013 2014 2015

Policyholders’ surplus I 03 * in EUR million

12,00012000 10,239.5 10,267.3 8,947.2 8,767.9 10,00010000 6,987.0 7,338.2 8,0008000 5,621.6 4,878.4 5,295.1 6,0006000 4,708.4 4,0004000 2,0002000 00 2006 2007 2008 2009 2010 2011 2012 1 2013 2014 2015

Book value per share I 04 * in EUR

80 66.90 70 62.61 60 60 50.02 48.83 50 37.39 41.22 40 40 30.80 24.03 27.77 23.47 30 20 20 10 0 0 2006 2007 2008 2009 2010 2011 2012 1 2013 2014 2015

Dividend I 05 * in EUR

4.75 2, 3 5 5 4.25 2

4 2 4 3.00 3.00 1.25 1.50 2 3 3 2.30 2.10 2.30 2.10 0.40 1.60 2 2 0.50 2.60 3.00 3.25 1 1 1.80 – 0 0 2006 2007 2008 2009 2010 2011 2012 1 2013 2014 2015

1 Adjusted pursuant to IAS 8 2 Dividend of EUR 3.25 plus special dividend of EUR 1.50 for 2015; EUR 3.00 plus special dividend of EUR 1.25 for 2014 as well as EUR 2.60 plus special dividend of EUR 0.40 for 2012 and EUR 1.80 plus special dividend of EUR 0.50 for 2007 3 Proposed dividend About us

Hannover Re, with gross premium of more than EUR 17 billion, is the third-largest reinsurer in the world.

We transact all lines of property & casualty and life & health reinsurance and are present on all continents with roughly 2,500 staff. Established in 1966, the Hannover Re Group today has a network of more than 100 subsidiaries, branches and representative offices worldwide. The German business of the Hannover Re Group is transacted by our subsidiary E+S Rück.

The rating agencies most relevant to the insurance industry have awarded both Hannover Re and E+S Rück very good financial strength atings:r Standard & Poor’s “AA-” (Very Strong) and A.M. Best “A+” (Superior).

Contents

For our investors 2 Further information 242

Letter from the Chairman of the Executive Board 2 Branch offices and subsidiaries Executive Board of Hannover Rück SE 6 of the Hannover Re Group abroad 242 The Hannover Re share 10 Glossary 245 Our strategy 16 List of graphs, tables and charts * 250 Financial calendar 253 Contact information 254 Combined management report 22 Imprint 255

Annual financial statements 135

Notes 145

Supervisory Board 238 * Graphs, tables and charts are numbered and listed Report by the Supervisory Board 238 on page 250 et seq. Supervisory Board of Hannover Rück SE 241

Hannover Re | Annual Report 2015 1 Ulrich Wallin, Chairman of the Executive Board

Dear Shareholders, Ladies and Gentlemen,

The 2015 financial year was an exceptionally successful one for your company. This is reflected firstly in the record profit that we can report for what is now the fourth consecutive time. Even more signifi cant, however, is the fact that in 2015 we were able to substantially strengthen the platform that we have put in place for achieving our financial goals going forward. In property and casualty reinsurance, for example, we again appreciably increased the confidence level of our loss reserves despite the difficult market environment. This should help us to post continued good underwriting results even in the challenging years to come. In life and health reinsurance we further boosted the value of new business and, what is more, we improved the profitability of the existing portfolio by taking targeted actions. We have thus cemented a robust foundation for further increasing the underlying profitability of our life and health reinsurance business. When it comes to our investments, we took purposeful structural steps that should enable us to keep the return on investment broadly stable in absolute terms. This was supported by further considerable growth in the portfolio of assets under own management, facilitated by a sharply higher operating cash flow compared to the previous year.

As our valued shareholders, you can therefore rest assured that your company has established a very good basis for continued success in the coming years, which will be shaped by a challenging general business climate. Our foundation is the successful implementation of our strategic approach geared to “long-term success in a competitive business”.

As we consider the highly satisfactory figures more closely, I would like to highlight the increase of around 17 percent in Group net income to EUR 1.15 billion. This is the first time that we can report a net profit for the Group in excess of EUR 1 billion. It is also pleasing to note that despite an intensely competitive market we enlarged our gross premium volume to EUR 17 billion. This is equivalent to currency-adjusted growth of some nine percent. Similarly, your company’s shareholders’ equity rose by almost seven percent to EUR 8 billion. The average shareholders’ equity, the basis on which we calculate the return on equity, actually increased by more than 16 percent. The return on equity nevertheless remained stable at a very pleasing 14.7 percent. This shows that we have succeeded in boosting the profitability of your company in step with the growth in shareholders’ equity.

2 Hannover Re | Annual Report 2015 Both on the basis of its capitalisation under the newly implemented solvency regime (Solvency II) and in the assessment of the rating agencies, Hannover Re is comfortably capitalised. With this in mind, For our investors For we had already distributed a special dividend to you last year with an eye to capital management considerations. In view of the gratifying development of our business, the Executive Board and Super visory Board intend to propose a further increase in both the basic dividend and the additional special dividend to the Annual General Meeting in May 2016. Consequently, it is envisaged that the total distribution should be raised to EUR 4.75 per share, split into a dividend of EUR 3.25 per share and a special dividend of EUR 1.50 per share. The increase in the basic dividend reflects your company’s stronger profitability.

I would also like to mention at this juncture how particularly pleased we were in the context of the new solvency regulations (Solvency II) to receive approval from the Federal Financial Supervisory Authority for the use of our internal capital model to calculate the quantitative solvency for the Hannover Re Group as early as the third quarter of the year under review. In the fourth quarter the same was then also true of the individual companies Hannover Rück SE, E+S Rück and Hannover Re Ireland. We are better able to map the risk structure of our business using our internal model rather than the standard model and hence we can efficiently implement the capital requirements according to Solvency II.

I would now like to explore in greater detail the developments in our business groups of Property & Casualty and Life & Health reinsurance and on the investments side.

The market environment in property and casualty reinsurance remained intensely competitive in the year under review with the associated rate reductions. The key driver here is the fact that natural catastrophe losses were below the expected levels over the past four years, as a consequence of which reinsurers posted generally good results. This prompted an increased inflow of capacity into the markets both from traditional reinsurers as well as in the form of so-called alternative capital from pension funds, hedge funds and other investors. The supply of reinsurance capacity thus rose considerably more sharply than demand.

Thanks to our very good market position Hannover Re nevertheless achieved a business development in the year under review with which we can be thoroughly satisfied. Our long-standing, stable customer relationships and our good ratings were particularly crucial in enabling us to write business selectively and only at conditions that satisfied our margin requirements. Despite this, we boosted the premium volume by eight percent – adjusted for exchange rate effects – to more than EUR 9 billion. What is particularly gratifying is that the rise in premium income was accompanied by an even more significant increase in the underwriting result to EUR 432 million. The combined ratio improved from 94.7 percent to 94.4 percent. The quality of the underwriting result is also borne out by the fact that the growth was not generated at the expense of the confidence level of our loss reserves. Quite the contrary: the confidence level actually showed further improvement.

The major loss expenditure of EUR 573 million was higher than in 2014, when it came in at EUR 426 million. Nevertheless, this figure was still well below our budgeted level of EUR 690 million. The largest single loss was the devastating series of explosions at the port of the Chinese city of Tianjin, costing EUR 111 million. The operating profit (EBIT) in property and casualty reinsurance grew by almost 13 percent to an exceptionally pleasing EUR 1.3 billion.

We improved the operating result (EBIT) in life and health reinsurance by some 54 percent to EUR 405 million. Our financial solutions business, in particular, played a vital part in this gratifying development. The very good underlying profitability here was bolstered by positive non-recurring effects. Our mortality and morbidity business, on the other hand, incurred negative one-off effects, such as those recorded at our branch in France. In terms of the underwriting result, these effects – which each ran into the mid-double-digit million euro range – largely offset one another; the posted underwriting result is therefore a good reflection of the underlying profitability in the year under review. The special effect of roughly EUR 40 million recognised in investment income in relation to an early termination fee for a cancelled contract will not, however, be so readily repeated in the coming years.

Hannover Re | Annual Report 2015 3 US mortality business, and especially a block of business that we had acquired in 2009, again performed unsatisfactorily. Still, it is pleasing to report that we were able to implement measures in this area that should lead to improved profitability. We substantially reduced the annual collateralisation costs while at the same time raising the reinsurance rates for a number of very poorly performing treaties. This should improve the profit outlook for this segment by an amount in the mid-double-digit millions of euros.

We moved forward on our expansionary course in life and health reinsurance in the financial year just ended. Gross premium adjusted for exchange rate effects rose by around ten percent to EUR 7.7 billion. As already mentioned, this growth went hand-in-hand with an even stronger increase in the earnings figures.

Given that the general business environment is by no means straightforward, we are also highly satisfied with the development of our investment income. The portfolio of assets under own management grew to more than EUR 39 billion, thanks not least to a continued positive cash flow. This is all the more remarkable because the valuation reserves fell again – on the back of higher risk premiums on corporate bonds – and we paid a substantially increased dividend of EUR 513 million. Despite the drop in interest rates, we boosted the investment income from assets under own management by a size able 16 percent to EUR 1.3 billion. The key contributory factors here are our increased exposure to real estate as well as income from private equity investments. The net return on assets under own manage ment stood at 3.4 percent and thus came in comfortably better than planned. Including interest on funds withheld and contract deposits, net investment income grew to a very pleasing EUR 1.7 billion, equivalent to growth of 13 percent.

As I mentioned at the outset, your company has entered the current year in a very healthy financial state. In view of the intense competition prevailing in both property & casualty and life & health reinsurance, our primary emphasis for 2016 is on achieving a result that meets our financial targets. Growing our premium volume is less of a priority. With this in mind, it is our expectation that gross premium income will remain stable or may contract slightly. On the other hand, despite the fiercely competitive state of the property and casualty reinsurance market, the combined ratio is expected to again come in below our strategic target of 96 percent. This is subject to the proviso that major losses do not significantly exceed our increased budget of EUR 825 million. In life and health reinsurance the underlying trend of improving results is expected to be sustained in the current year. As far as the profit expectation is concerned, it must of course be borne in mind that we cannot anticipate another positive one-off effect. Turning to the investments, we expect to see further growth in our asset holdings. This should enable us to keep the investment income broadly stable in absolute terms, despite a lower expected return of 2.9 percent.

4 Hannover Re | Annual Report 2015 All in all, we are again expecting to post very good business results for your company in 2016. Provided major losses remain within the bounds of expectations and as long as there are no exceptional distor- For our investors For tions on the investment side, we anticipate Group net income in the order of EUR 950 million.

I would like to take this opportunity to thank you, our valued shareholders, most sincerely for your trust – also on behalf of my colleagues on the Executive Board. I would also like to express my appreciation to our employees for their very good and reliable work. Going forward, as in the past, you can rest assured that we shall do everything in our power to safeguard Hannover Re’s successful development. It is and will remain our goal to increase the value of your company on a sustainable basis.

Yours sincerely,

Ulrich Wallin Chairman of the Executive Board

Hannover Re | Annual Report 2015 5 Executive Board of Hannover Rück SE

Roland Vogel Ulrich Wallin Claude Chèvre Finance and Accounting Chairman Life & Health Reinsurance Information Technology Business Opportunity Management • Africa, Asia, Australia / New Investment and Collateral Management Compliance Zealand, Latin America, Facility Management Controlling Western and Southern Europe Human Resources Management • Longevity Solutions Internal Auditing Risk Management Dr. Klaus Miller Corporate Development Life & Health Reinsurance Corporate Communications • United Kingdom / Ireland, North America, Northern, Eastern and Central Europe

6 Hannover Re | Annual Report 2015 From left to right: Roland Vogel, Ulrich Wallin, Claude Chèvre, Dr. Klaus Miller, Sven Althoff, Dr. Michael Pickel, Jürgen Gräber For our investors For

Sven Althoff Dr. Michael Pickel Jürgen Gräber Specialty Lines Worldwide Group Legal Services Global Reinsurance • Marine Run-Off Solutions • Worldwide Treaty Reinsurance • Aviation Target Markets in Property & Casualty • Catastrophe XL (Cat XL) • Credit, Surety and Political Risks Reinsurance: • Structured Reinsurance and • United Kingdom, Ireland, London • North America Insurance-Linked Securities Market and Direct Business • Continental Europe Coordination of Property & Casualty • Facultative Reinsurance Business Group Quotations Retrocessions

Hannover Re | Annual Report 2015 7 South bank of the Main River, Frankfurt / Main, Germany

8 Hannover Re | Annual Report 2015 Always …

… ef fi c i ent

Capital allocation – efficiently managed In the early years after its founding Hannover Re operated with scarce capital resources. This led, in the first place, to systematic strengthening of the reserves from organic growth in times of high interest income, while at the same time it resulted in a sophisticated risk-based capital model that enabled the company to write the most profitable business possible with its limited capital resources. Thanks to this capital model, we are able to identify attractive business, optimally deploy our capital in business groups, regions and lines and leverage potential scope for diversification. In 2015 this was the first internal model of any reinsurance company to be approved by the financial supervisory authority.

Hannover Re | Annual Report 2015 9 The Hannover Re share • Share price listed at new all-time high of EUR 111.50 • Share performance of +47.8% incl. reinvested dividends • Proposed dividend of EUR 3.25 plus special dividend of EUR 1.50 per share above the strategic payout ratio

Turbulent year in business leads to Hannover Re share reaches new all-time volatile stock markets high of EUR 111.50

After investors had seen rather meagre returns on the German The Hannover Re share had started 2015 at a price of EUR 74.97 stock market in 2014, German blue chips enjoyed a spectacular and was to slip to its lowest point of the year after just five upswing right out of the gate as 2015 got underway. Driven by days at EUR 73.81. In the spring, supported by broadly pos- the European Central Bank’s easing of monetary policy – the itive market sentiment and the unveiling of another record extent of which came as a surprise to markets – the German result for the financial year just ended, the share posted steady DAX bellwether index had already broken through 12,000 price gains and passed the EUR 100 mark for the first time on points by March. This trend was supported by the weaker 10 April 2015. In the course of the following summer months euro, which came as a boon to the heavily export-dependent until autumn the share was unable to divorce itself from the German economy. The terrorist attacks in Paris, the possibility general sense of uncertainty prevailing on the markets, lead- of Greece leaving the Eurozone, the flashpoints in the Middle ing to a volatile performance with a number of setbacks. The East, the sustained drop in the price of oil, the rise in interest sustained competitive intensity on reinsurance markets and rates in the United States and softer economic data coming out the associated news on the renewals in property and casualty of China – all these factors exacerbated the nervous mood on reinsurance – with corresponding rate erosion – had a det- stock markets, giving rise to sometimes marked price volatility. rimental impact on the share valuation. At the same time, a major loss experience that remained well below expectations The German DAX index had entered 2015 at 9,806 points. After and pleasing Group net income for the first half-year generated its early rally the index surpassed the magic 12,000 mark for positive demand on the stock market. In times of low capital the first time in its history on 16 March 2015. It was not, how- market rates investors increasingly looked at the Hannover Re ever, a level that could be sustained over the longer term. By share – and especially its attractive dividend yield – in 2015. In the end of August Germany’s leading index had slipped back the fourth quarter the share moved higher, touching its highest below its level at the start of the year at 9,648 points, finally point of the year – and new all-time high – of EUR 111.50 on closing the year after some ups and downs at 10,743 with a 2 December 2015. This performance was supported primarily gain of 9.6%. The performance of the MDAX was similarly by the expectation that Hannover Re would post another very volatile: standing at 16,935 as the year got underway, it had favourable Group result for 2015. This assumption was based surged to an impressive 21,114 by mid-March. The ensuing on the insight that thanks to its comfortable capital resources, rollercoaster ride left the index at 20,775 points after twelve prudently calculated loss reserves and very good market posi- months with a gain of 22.7%. The Dow Jones, by contrast, tion as a broadly diversified reinsurer, Hannover Re should be moved in the opposite direction to end 2015 2.2% lower at able to deliver good results even in the prevailing competitive 17,425 points. market climate and hence again set a higher payout ratio for

Highs and lows of the Hannover Re share I 09 in EUR

110.75 111.50 110 105.25 101.35 100.45 100 100 97.56 97.81 102.35 103.60 93.94 92.21 90.05 90 86.15 91.04 89.13 87.00 87.63 88.43 81.74 85.86 85.41 86.40 80 80 80.57

73.81 70 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Monthly average Highs and lows (closing prices)

10 Hannover Re | Annual Report 2015 Relative performance of the Hannover Re share I 10 in % For our investors For

2,5250

2,0200

1,5150

1,0100

50 0,5 2013 2014 2015

Hannover Re share (including dividend) DAX MDAX Global Reinsurance Index

the dividend distribution in the year under review. The Han- Proposed dividend again exceeds the nover Re share closed the financial year with a gain of 40.9% strategic payout ratio at EUR 105.65 and thus recorded a performance of 47.8% including reinvested dividends. Over the year the Hannover Re The Executive Board and Supervisory Board intend to propose to share comfortably outperformed its benchmark indices, namely the Annual General Meeting on 10 May 2016 that a dividend of the DAX (+9.6%), MDAX (+22.7%) and the Global Reinsur- EUR 3.25 plus a special dividend of EUR 1.50 per share should ance (Performance) Index (+22.5%). The Global Reinsurance be distributed. In keeping with the previous year, the special div- Index tracks the share performance and dividend payments of idend will be paid as a capital management measure because the the world’s 20 largest reinsurers. Hannover Re measures its company’s capitalisation continues to be comfortably in excess performance by this benchmark index. of the required capital. Based on the year-end closing price of EUR 105.65, this produces a dividend yield of 4.5%. In a three-year comparison the Hannover Re share delivered a performance (including reinvested dividends) of 106.4%. It therefore once again clearly outperformed the DAX (41.1%) Annual General Meeting looks back on a and MDAX (74.4%) and the Global Reinsurance Index (92.6%) record financial year benchmark indices. The Annual General Meeting of Hannover Rück SE was held on Based on the year-end closing price of EUR 105.65, the market 6 May 2015 in Hannover. Altogether, including postal ballots capitalisation of the Hannover Re Group totalled EUR 12.7 bil- around 73% of the share capital was represented. lion at the end of the 2015 financial year, an increase of EUR 3.7 billion or 40.9% compared to the previous year’s fig- In his address to shareholders Chief Executive Officer Ulrich ure of EUR 9.0 billion. According to the rankings drawn up by Wallin took the opportunity to look back once more on the Deutsche Börse AG, the company placed seventh in the MDAX record year of 2014, in which Hannover Re had again sur- at the end of December with a free float market capitalisation of passed the previous year’s result with an after-tax profit EUR 6,484.2 million and a trading volume of EUR 4,748.7 mil- of EUR 985.6 million. The two business groups of Prop- lion over the past twelve months. All in all, the Hannover Re erty & Casualty and Life & Health reinsurance as well as the Group thus continues to rank among the 40 largest listed com- investment income all contributed to this successful perfor- panies in Germany. mance. In light of this good result and the company’s very healthy capitalisation, the shareholders accepted the proposal With a book value per share of EUR 66.90 the Hannover Re of the Executive Board and Supervisory Board that a gross div- share showed a price-to-book (P/B) ratio of 1.58 at the end of idend of EUR 4.25 per share should be paid. The payout took the year under review; compared to the average MDAX P/B the form of a dividend of EUR 3.00 per share and a special ratio of 2.44 as at year-end the share thus continues to be very dividend of EUR 1.25 per share, with the special dividend to moderately valued. be considered a capital management measure. This proposal,

Hannover Re | Annual Report 2015 11 together with all other proposed resolutions put to the vote, was was also assessed by the rating agency Oekom Research; its approved by the Annual General Meeting by a large majority. above-average fulfilment of industry-specific requirements was confirmed with the award of “prime” status. Hannover Re also All voting results and the attendance were published on the retained its place in the worldwide FTSE4Good Index Series company’s website following the Annual General Meeting. The in the financial year just ended. next Annual General Meeting will be held on 10 May 2016 in Hannover. Shareholding structure

Strong presence maintained on the The shareholding of Talanx AG in Hannover Re was unchanged capital market at 50.2% as at 30 November 2015. The breakdown of the free float remained unchanged year-on-year. Against the backdrop of a sustained competitive reinsurance environment and volatile capital markets, Hannover Re expe- Shareholding structure as at 30 November 2015 I 11 rienced continued strong demand for information on the part of its investors in 2015. Our event activities consequently 7.8% Private investors remained on a high level. Altogether, members of the Executive 50.2% Talanx AG Board and representatives of the Investor Relations department attended 16 international capital market conferences (previous year: 15) and 19 roadshows (21). We retained our focus on the financial centres of Frankfurt and London, which we visited at least once a quarter. The cities of Amsterdam, Dub- 42.0% Institutional lin, Geneva, Copenhagen, Lugano, Lyon, Milan, Munich, New investors York, Paris, Tokyo, Vienna and Zurich were further destinations that we revisited. Berlin, Boston, Brussels, Hong Kong, Madrid, Naples, Nice, Rome and Toronto featured on our agenda for the first time. At the end of November 2015 a shareholder identification analysis was carried out, i. e. an analysis of the company’s share- Hannover Re’s 18th Investors’ Day was held on 14 October holding structure that goes beyond the entries in the share 2015 in Frankfurt / Main. Around 40 analysts and institutional register. It determined that the geographical breakdown of the investors made the most of the opportunity to engage in an shares held by institutional investors is as follows: intensive exchange of views with members of the Executive Board. The focus this time was on a discussion of new business Geographical breakdown of the shares I 12 opportunities in reinsurance, such as the insurance of cyber held by institutional investors and agricultural risks as well as microinsurance products for developing countries or integrated lifestyle insurance concepts 3.3% Scandinavia 1.6% Rest of Europe intended to promote healthy living on the part of insureds. The 3.4% Switzerland 0.6% Rest of world Executive Board also used the occasion to explain in detail 4.5% Asia the establishment of claims equalisation reserves at insurance 32.4% United States 5.0% France undertakings in accordance with the German accounting prin- 7.5% Benelux ciples of the Commercial Code (HGB) as well as their implications for earnings performance, as illustrated by Hannover Re. 9.7% Canada The latter topic was met with considerable interest among the participants in view of its relevance to the company’s ability to 12.4% United Kingdom 19.6% Germany pay a dividend. As in the previous years, all interested parties were able to follow the event in full via a live webcast on the company’s website. Analysts sharply increase price target Sustainability reporting In the year just ended Hannover Re again provided informa- In total, around 200 analyst recommendations were published tion about its achievements as a responsible enterprise in the for Hannover Re and the insurance sector in the 2015 finan- form of a stand-alone sustainability report drawn up in accord- cial year. By the end of the year 32 analysts had handed down ance with the internationally recognised reporting standards opinions on Hannover Re: three analysts (6) recommended of the Global Reporting Initiative (GRI). Based on this struc- the Hannover Re share as “buy” or “overweight”. Altogether tured reporting format, which was presented for the fourth eight opinions (20) were a “hold”. “Underweight” or “sell” year in succession, the company’s sustainability performance recommendations were issued a total of 21 (7) times, making

12 Hannover Re | Annual Report 2015 this the most common. According to analysts, the marked shift supposedly limited scope for growth on the valuation side. Par- in recommendations away from “hold” towards “sell” within allel to this, the analysts raised the average price target sub- For our investors For the year was motivated by the significantly more favourable stantially from EUR 67.49 at the start of the year to EUR 91.88 performance – looked at in relative terms – of the Hannover at year-end (+36.1%). Re share measured against comparable stocks and hence the

Basic information I 13

Securities identification number 840 221 International Securities Identification Number (ISIN) DE 000 840 221 5 Ticker symbols Bloomberg HNR1 Thomson Reuters HNRGn ADR HVRRY Exchange listings Germany Xetra, Frankfurt, Munich, Stuttgart, Hamburg, Berlin, Düsseldorf, Hannover (official trading: Xetra, Frankfurt and Hannover) United States American Depositary Receipts (Level 1 ADR program; 2 ADR = 1 share) Market segment Prime Standard Index inclusion MDAX First listed 30 November 1994 Number of issued shares (as at 31 December 2015) 120,597,134 Common shares (as at 31 December 2015) EUR 120,597,134.00 Share class No-par-value registered shares

Key figures I 14

in EUR 2015 2014 2013 2012 1 2011 Number of shares in million 120.6 120.6 120.6 120.6 120.6 Annual low 2 73.81 58.88 52.42 37.355 29.31 Annual high 2 111.50 75.92 64.34 59.81 43.29 Year-opening price 2 74.97 62.38 58.96 38.325 40.135 Year-ending price 2 105.65 74.97 62.38 58.96 38.325 Market capitalisation at year-end in EUR million 12,741.1 9,041.2 7,522.8 7,110.4 4,621.9 Equity attributable to shareholders of Hannover Rück SE in EUR million 8,068.3 7,550.8 5,888.4 6,032.5 4,970.6 Book value per share 66.90 62.61 48.83 50.02 41.22 Earnings per share (basic and diluted) 9.54 8.17 7.43 7.04 5.02 Dividend per share 3.25 + 1.50 3, 4 3.00 + 1.25 4 3.00 2.60 + 0.40 4 2.10 Cash flow per share 25.75 16.01 18.45 21.87 20.92 Return on equity (after tax) 5 14.7% 14.7% 15.0% 15.4% 12.8% Dividend yield 6 4.5% 5.7% 4.8% 5.1% 5.5% Price-to-book (P / B) ratio 7 1.6 1.2 1.3 1.2 0.9 Price / earnings (P / E) ratio 8 11.1 9.2 8.4 8.4 7.6 Price-to-cash flow (P / CF) ratio 9 4.1 4.7 3.4 2.7 1.8

1 Adjusted pursuant to IAS 8 2 Xetra daily closing prices from Bloomberg 3 Proposed dividend 4 Dividend of EUR 3.25 plus special dividend of EUR 1.50 for 2015, EUR 3.00 plus special dividend of EUR 1.25 for 2014 and EUR 2.60 plus special dividend of EUR 0.40 for 2012 5 Earnings per share / average of book value per share at start and end of year 6 Dividend per share / year-end closing price 7 Year-end closing price / book value per share 8 Year-end closing price / earnings per share 9 Year-end closing price / cash flow (from operating activities) per share

Hannover Re | Annual Report 2015 13 Huangpu River- side promenade, Shanghai, China

14 Hannover Re | Annual Report 2015 For our investors For

Always …

… p ersistent

Persevering in the Chinese market

创业容易, 守业更难 – “Chuàng yè róng yì, shǒu yè gèng nán.” A Chinese proverb says: “To open a shop is easy; to keep it open is an art”. Rightly so: regulatory hurdles and intense competition have long made China a challenging target market. Yet Hannover Re has been involved in this market for more than forty years, with its oldest treaty dating back to 1971. It has had a local presence for some 25 years: in Hong Kong since 1990 with a service office and since 1999 with a branch, and also in Shanghai since 2008 with another branch. Today, our staying power is paying off: Hannover Re has expanded vigorously in China over the past ten years.

Hannover Re | Annual Report 2015 15 Our vision: Long-term success in a competitive business

Excellent solutions for our business partners constitute the basis for strengthening and further expanding our position as a leading, globally operating reinsurance group. They enable us to deliver long-term sustainable profitability and assert our position as one of the most profitable reinsurers worldwide.

We are passionate about reinsurance and chart our own course. We are quick, flexible and independent and we strive for excellence in our actions. By generating innovative business opportunities from newly emerging risks we consistently expand the scope of our business. With our organisation geared to efficiency, we offer our business partners an attractive value proposition.

16 Hannover Re | Annual Report 2015 1 We have ambitious profit and growth targets our investors For • Generate an IFRS return on equity of at least 900 basis points above the risk-free interest rate • Achieve profitability targets and generate a profit clearly in excess of the cost of capital • Grow the premium volume (by more than the market average) • Outperform the Global Reinsurance Index (GloRe) over a three-year period • Consistently pay an attractive dividend

2 We are a preferred business partner • Offer an attractive value proposition that makes us the preferred business partner for our clients • Foster customer relationships to both parties’ mutual benefit irrespective of the size of the account

3 We aim for successful employees • Offer attractive workplaces • Foster the qualifications, experience and commitment of our staff

4 We strive for an optimal balance between stability and yield of our investments • Achieve the target return – risk-free interest rate plus cost of capital

5 We manage risks actively • Ensure protection of capital through quantitative risk management • Ensure protection of capital through qualitative risk management

Hannover Re | Annual Report 2015 17 6 We maintain an adequate level of capitalisation • Ensure that requirements for equity resources (economic capital model, solvency regulations, etc.) are met • Optimise the overall cost of capital

7 We ensure low costs through an efficient organisational set-up • Ensure a lower expense ratio than our competitors

8 We use information technology to achieve a competitive advantage • Information and communication systems assure optimal support for business processes in light of cost / benefit considerations

9 We are committed to sustainability, integrity and compliance • Ensure conformity with all legal requirements • Encourage sustainable actions with respect to all stakeholders • Support considered and pragmatic principles of corporate governance and recognise their central role in guiding our activities

10 We strive for Performance Excellence and continuous improvement • Ensure the rigorous derivation of strategic objectives across all areas of the company

18 Hannover Re | Annual Report 2015 Our strategy in practice our investors For

Our strategy encompasses ten strategic principles for ensuring the realisation of our vision “Long-term success in a competitive business” across business units. We implement the strategy in accordance with our holistic management system Performance Excellence 2.0. This forward-looking management system is based on the Excellence Model of the EFQM (European Foundation for Quality Management) and has a clear strategic focus: each organisational unit of the Hannover Re Group defines its own contribution to the Group strategy with the aid of the internal Strategy Guide and our Strategy Cockpit tool. In this way, we ensure that all initiatives and activities within Hannover Re are rigorously linked to the corporate strategy.

Performance Excellence I 15

10 Check

10 Do

Focus on Strategic the employee objectives

Focus on the 7 customer

ocesses Pr 9 Focus on 3 society 5

Employees

Management 8 6 Partners4 and Resources 2 Strategy

10 Plan 10 Act

Hannover Re | Annual Report 2015 19 London Bridge, London, United Kingdom

20 Hannover Re | Annual Report 2015 Always …

… undogmatic

Life and health reinsurance – moving up in the industry through a wealth of ideas People’s life expectancy depends on numerous factors – spanning lifestyle just as much as state of health. Individual underwriting makes it possible to optimise the regular annuity income received by policy holders according to their risk predisposition. Since the mid-1990s we have played a pioneering role in revolutionising the UK market through the launch of such enhanced annuities. Today, our detailed understanding of the enhanced annuities market helps us to offer optimal solutions in the form of sophisticated health analyses that meet the needs of our customers. Even though the premium volume for enhanced annuities in the United Kingdom is contracting due to legislative changes, the enhanced annuities market will remain an attractive segment.

Hannover Re | Annual Report 2015 21 Combined management report

Foundations of the Group 23 Business model 23 Management system 23 Research and development 27

Report on economic position 30 Macroeconomic climate and industry- specific environment 30 Business development 33 Overall assessment of the business position 35 Results of operations 35 Property & Casualty reinsurance 36 Life & Health reinsurance 47 Investments 51 Financial position and net assets 53 Information on Hannover Rück SE 60

Other success factors 65 Our staff 65 Sustainability at Hannover Re 67

Opportunity and risk report 72 Risk report 72 Opportunity report 95

Enterprise management 99 Declaration on Corporate Governance 99 Remuneration report 103

Outlook 126 Forecast 126 Events after the reporting date 133

22 Hannover Re | Annual Report 2015 Foundations of the Group

Business model • Worldwide reinsurance, transacting all lines of property & casualty and life & health reinsurance with the goal of achieving the most balanced possible regional and line-based diversification • Competitive advantages due to our low cost of capital and administrative expense ratio • Financial strength secured through rigorous risk management

With a gross premium volume of around EUR 17.0 billion, Han- In the Property & Casualty reinsurance business group we con- nover Re is the third-largest reinsurer in the world. We trans- sider ourselves to be a reliable, flexible and innovative market act reinsurance in our Property & Casualty and Life & Health player that ranks among the best in any given market. Cost business groups. leadership, effective cycle management and superlative risk Combined management report management are the key elements of our competitive position. The strategy pursued in both property & casualty and life & health reinsurance supports our Group’s paramount mission, In the Life & Health reinsurance business group we are recog- namely: “Long-term success in a competitive business”. Our nised – as customer surveys confirm – as one of the top players entire business operations are geared to our goal of being and the leading provider of innovative solutions. We achieve the best option for our business partners when they come to this standing by opening up new markets for our company and choose their reinsurance provider. It is for this reason that by identifying trends in order to anticipate the future needs our clients and their concerns form the focus of our activities. of our customers.

We generate competitive advantages to the benefit of our clients and shareholders by conducting our insurance business with lower administrative expenses than our rivals. In this way Management system we deliver above-average profitability while at the same time being able to offer our customers reinsurance protection on competitive terms. Value-based management

Through the acceptance of reinsurance risks with little or no Our integrated system of enterprise management consti- correlation in our Property & Casualty and Life & Health busi- tutes the basis for accomplishment of our strategic objec- ness groups across all lines of business and based on our global tives. Located at its core are, first and foremost, our profit and presence, we are able to achieve efficient risk diversification. growth targets, which are summarised for the Group and its In conjunction with our capital management, this is the key to business groups in the so-called target matrix. In addition to our comparatively low cost of capital. traditional performance indicators geared to the IFRS balance sheet, our system of strategic targets also includes economic Guided by a clearly defined risk appetite, our risk management targets derived from our certified internal capital model. The steers the company so as to be able to act on business opportu- targets are regularly analysed and adjusted in the context of nities while securing our financial strength on a lasting basis. the strategy review conducted at periodic intervals. Our focus is on long-term strategic target attainment. We transact primary insurance in selected market niches as a complement to our core reinsurance activities. In this context, we always work together with partners from the primary insurance sector.

Our subsidiary E+S Rückversicherung AG (E+S Rück) , as the “dedicated reinsurer for the German market”, offers a range of products and services tailored to the specific features of the German market. Of special importance here are the mutual insurers with whom we maintain a strategic partnership that is underscored through their participation in E+S Rück.

Hannover Re | Annual Report 2015 23 Target attainment M 01

Business group Key data Targets for 2015 Target attainment 2015 2014 2013 Ø 2013 – 2015 1 Group Investment return 2 ≥ 3.0% 3.5% 3.3% 3.4% 3.4% Return on equity 3 ≥ 10.2% 14.7% 14.7% 15.0% 14.8% Growth in earnings per share (year-on-year comparison) ≥ 6.5% 16.7% 10.1% 5.4% 10.6% Value creation per share 4 ≥ 7.5% 13.6% 34.4% 3.6% 15.5% Property & Gross premium growth 3 – 5% 5 8.1% 1.2% 3.5% 4.2% Casualty Combined ratio ≤ 96% 6 94.4% 94.7% 94.9% 94.7% reinsurance EBIT margin 7 ≥ 10% 16.6% 17.0% 15.5% 16.3% xRoCA 8 ≥ 2% 7.4% 10.7% 4.7% 7.6% Life & Health Gross premium growth 5 – 7% 9 9.5% 4.9% 5.1% 6.5% reinsurance Value of New Business ≥ EUR 180 EUR 543 EUR 448 EUR 309 EUR 433 (VNB) 10 million million million million million EBIT margin 7 Financial Solutions / Longevity ≥ 2% 11.0% 5.0% 5.2% 7.2% EBIT margin 7 Mortality / Morbidity ≥ 6% 3.6% 4.8% 1.2% 3.3% xRoCA 8 ≥ 3% 8.9% 7.3% 8.4% 8.3%

1 Average annual growth, otherwise weighted averages 2 Excluding effects from ModCo derivatives and inflation swaps 3 After tax; target value: 900 basis points above the 5-year average return on 10-year German government bonds 4 Growth in book value per share including dividend paid 5 Average over the reinsurance cycle; at constant exchange rates 6 Including major loss budget of EUR 690 million 7 EBIT / net premium earned 8 Excess return on allocated economic capital 9 Organic growth only; annual average growth (5 years); at constant exchange rates 10 Based on a cost of capital of 6% (until 2014: 4.5%)

24 Hannover Re | Annual Report 2015 In Performance Excellence (PE) we have at our disposal a consistent method Group-wide that enables us to steer the development of the company and measure the extent to which we have achieved our strategic objectives. The decentralised approach used by PE is of special importance in this context: every single organisational unit defines and continuously examines its contributions to execution of the Hannover Re Group strategy and develops improvement initiatives.

System of value-based management: M 02 Performance Excellence (PE) combines the strategic and operational levels

Plan Implementation Evaluation

Executive Board Executive Board Executive Board Strategy retreat / GMF 1 retreat / GMF 1 retreat / GMF 1 Combined management report

Performance PE Check 2 PE Check 2 PE Check 2 Excellence

Management Results Reporting

Risks process Planning Planning

Resources

Management Agreement on targets Attainment of targets by Objectives

Planning year -1 Planning year Planning year +1

1 The Global Management Forum (GMF) brings together senior managers of the Hannover Re Group from around the world for the purpose of defining strategic orientations. The parameters developed here serve as the basis for the subsequent planning process. 2 Verification and elaboration of contributions to the Group strategy

Management by Objectives Management Reporting Some of the targets that emerge out of the target matrix are The annual Management Reporting presents in detail the integrated into the individual agreements on objectives with respective degree of target attainment – also in comparison managers. When it comes to the definition of objectives, the with our planning – for each individual treaty / regional depart- participants take into account not only standardised financial ment and service unit as well as for the two business groups indicators but also non-financial variables derived from the of Property & Casualty and Life & Health and for the Group as strategic parameters. a whole. On this basis appropriate performance controlling is carried out, potential scope for improvement and refinement is identified and performance-oriented remuneration components defined in the context of Management by Objectives are established.

Hannover Re | Annual Report 2015 25 Capital allocation With the aid of the IVC ratio it is possible to compare the value The basis of value-based management is the risk-appropriate contributions of the Group as a whole, its two business groups allocation of capital to the individual business activities. This and the individual operational units. This enables us to reliably enables us to evaluate the acceptance of underwriting risks identify value creators and value destroyers. In this way, we can and investment risks both in light of individual risk / return aspects and against the backdrop of our overall risk appetite. • optimise the allocation of capital and resources, Our internal capital model supplies the key parameters for this • identify opportunities and risks and purpose. In addition, along with considerations of business • measure strategy contributions with an eye to our policy, outside influencing factors such as the requirements demanding profit and growth targets. of regulatory authorities and rating agencies also play a major role in the allocation of capital. Allowance is therefore made for The IVC (Intrinsic Value Creation) is calculated according to them in the form of collateral conditions on the various alloca- the following formula: tion levels. Starting out from the Group’s overall risk situation, Adjusted operating profit (EBIT) − (capital allocated × weighted capital is first allocated to the functional areas of underwriting cost of capital) = IVC and investments. We then further divide the capital within the underwriting sector, first between the business segments of The adjusted operating profit (EBIT) is comprised of two fac- property & casualty reinsurance and life & health reinsurance tors: the IFRS Group net income recognised after tax and the and then between the various reinsurance products and accord- change in the balancing items for differences between eco- ing to risk categories / treaty types and lines. In this way, we nomic valuations and amounts stated in the IFRS balance sheet. ensure that our profit targets including risk, cost and return By way of the latter we make allowance for changes in the fair considerations are consistently factored into the evaluation and values of assets not recognised in income under IFRS as well pricing of our various reinsurance products. as the change in the discount effects of the reserves in property and casualty reinsurance and in the Embedded Value Not IVC – the strategic management ratio Recognised (EVNR) in life and health reinsurance. In addition, In order to fine-tune the portfolios and individual treaties we interest on hybrid capital already recognised in the IFRS Group apply underwriting-year-oriented measurement principles net income and the non-controlling interest in profit and loss based on expected cash flows that appropriately accommo- are included back in the calculation. date the specific characteristics of property & casualty and life & health reinsurance. The accomplishment of targets in a particular financial year is also of interest – especially from the standpoint of shareholders. Based on our internal capital model, the foundation of our enterprise management, we strive to generate a profit in excess of the cost of capital. This return – which is the decisive ratio for the management of our business activities – is referred to as Intrinsic Value Creation (IVC).

Intrinsic Value Creation and excess return on capital allocated M 03

2015 2014 in EUR million IVC xRoCA Reported IVC Adjustment 1 Final IVC xRoCA Property and casualty reinsurance 454.9 7.4% 616.2 0.0 616.2 10.7% Life and health reinsurance 251.8 8.9% 175.7 (3.8) 171.9 7.3% Investments 2 (16.4) -0.6% 615.5 0.0 615.5 26.2% Group 688.7 5.4% 1,401.5 (4.0) 1,397.5 12.0%

1 Adjustment based on final MCEV calculation (life and health reinsurance) 2 Income above risk-free interest after deduction of risk-appropriate cost of capital

26 Hannover Re | Annual Report 2015 The allocated capital consists of three components: the shareholders’ equity including non-controlling interests, the balancing Research and development items for differences between economic valuations and amounts stated in the IFRS balance sheet and the hybrid capital. In this Every market unit at Hannover Re is tasked with exploring context, capital that is not at risk (excess capital) is disregarded, market trends and developing innovative products. In addi- i. e. it is not broken down into business activities. Capital is allo- tion, opportunities and innovations that cut across markets cated to the profit centres as described above according to the and segments are coordinated by the specially created “Busi- risk content of the business in question. A systematic distinc- ness Opportunity Management” team and pursued by means tion is made here between the assumption of underwriting risks, of interdisciplinary projects in which various market and ser- on the one hand, and investment risks, on the other. Under the vice units play key roles. In this way, we develop products and IVC calculation, therefore, only risk-free interest income on the solutions that deliver value added both for Hannover Re and for generated cash flows is allocated to the business segments of our clients. By way of example, our move to give capital market property & casualty and life & health reinsurance. The investment players direct access to insurance risks as far back as the mid- income above and beyond risk-free is allocated in its entirety to 1990s through our “K” transactions puts us among the industry the functional area of investments and included in the IVC after pioneers. The intervening years have seen the evolution of a deduction of the risk-appropriate cost of capital and the admin- market for so-called insurance-linked securities, which is one istrative expenses. of the fastest growing markets in the insurance sector. Another Combined management report example of Hannover Re’s development activities is the crea- In calculating the cost of capital, our assumption – based on a tion of its own internal model for risk management under Sol- Capital Asset Pricing Model (CAPM) approach – is that the inves- vency II that caters to the requirements of various stakeholders tor’s opportunity costs are 450 basis points above the risk-free (regulators, rating agencies, capital providers) and was one of interest rate, meaning that value is created above this threshold. the first to be approved in Europe. Not only that, through our Our strategic return on equity target of 900 basis points above active involvement and the provision of financial assistance risk-free thus already contains a substantial target value crea- we support scientific initiatives geared to developing prod- tion. We allocate equity sparingly and use equity substitutes to ucts, solutions or markets that will be crucial success factors optimise our average cost of capital. At 5.4%, our average cost going forward in the viability of any reinsurance undertaking. of capital is comparatively low. Reinsurance business is founded on the comprehensive under- Since comparison of absolute amounts is not always meaningful, standing and active management of risks. Our specialists there- we have introduced the xRoCA (excess return on capital allo- fore continuously analyse known risks with an eye to changes cated) in addition to the IVC. This describes the IVC in relation in their structure and probability of occurrence, while at the to the allocated capital and shows us the relative excess return same time focusing on the early detection of newly emerg- generated above and beyond the weighted cost of capital. ing risks and working to provide our clients with appropriate solutions tailored to their needs (cf. here also the Opportunity report on page 95 et seq.). Operational management system Above and beyond this, Hannover Re makes systematic efforts A number of IFRS-based financial performance indicators are to identify new business opportunities in order to achieve sus- also embedded in our strategic system of targets and coordi- tainable growth and strengthen the profitable development nated with our parameters for value creation derived from the of the company. At our Global Executive Forum in 2015 we internal capital model. We use these indicators for operational expressly explored how to leverage emerging business oppor- management within the year, in part because they are available tunities, including those associated with innovative products promptly and also because they already provide initial pointers and risk covers as well as new sales channels and capabilities, as to whether we are likely to achieve our higher-order strate- and we mapped out a course for future growth. The goal is to gic objectives. These are for both business groups the growth generate new business and thereby support Hannover Re’s in gross premium, for property and casualty reinsurance the profitable growth on a lasting basis. For further details please combined ratio, for life and health reinsurance the EBIT mar- see the Opportunity report on page 95 et seq. gin and for the Group as a whole the return on investment. Non-financial performance indicators, on the other hand, are not used for operational management within the year.

Hannover Re | Annual Report 2015 27 Fifth Avenue, New York City, USA

28 Hannover Re | Annual Report 2015 Always …

… b old

Operating against the cycle – US casualty business We dare to write business that others find too risky – because we take a systematic approach to cycle management. US casualty business is just one example. When major events heighten the risk exposure, sharp market corrections normally ensue – prices for reinsurance protection go up. As a consequence of the financial and banking crisis that peaked in 2008 liability risks for executive officers in the financial sector rose, and we made increased capacities available for the D&O line. Our courage was rewarded with profitable growth.

Hannover Re | Annual Report 2015 29 Report on economic position

Macroeconomic climate and industry-specific environment • Global economy posts slightly weaker growth • Insurance industry still influenced by low interest rate environment • Implementation of risk-based solvency systems in Europe, China and South Africa • Losses from natural disasters again lower in 2015

Macroeconomic climate full year, however, the economy showed a further clear trend towards stabilisation. Private consumption continued to pick The expansion of the global economy slowed somewhat in up and government spending also increased. The development the course of 2015 and came in slightly below the level of the of the labour market, where the unemployment rate has now previous year at 3.1% (3.4%). Even though the anticipated fallen to 5.0%, points to a sustained cyclical upturn. slump in the world economy therefore failed to materialise, this is the weakest growth figure since the crisis year of 2009. Europe The economic climate in the Eurozone showed a modest recov- The advanced economies continued to record moderate ery: growth increased by 0.6 percentage points to 1.5%. The growth on the whole, although economic activity varied widely improved performance of countries that had still been experi- between countries and regions. As had already been the case encing discernible growth problems in 2014 was a factor here. in the previous year, the pace of growth in the United States Italy, for example, put the difficult previous year behind it to remained strong. In the United Kingdom, too, cyclical momen- deliver positive growth of 0.7%, while France boosted the pace tum remained intact despite a slight slowing in the expan- of its expansion to more than one percent again. The Spanish sionary trend. The economy in the Eurozone also developed economy picked up sharply with growth of 3.1%. Ireland, the favourably, although the pace of growth here remained min- peak growth performer, put on another 6.5%. After securing imal overall. While certain framework conditions such as the a hard-fought agreement with the countries giving it financial employment situation improved slightly, this was not sufficient backing, Greece is struggling to implement austerity plans and to deliver a fundamentally positive upward stimulus. Business will likely achieve at best zero growth in 2015. activity weakened markedly in Japan. The state of the jobs market continued to improve. Average Economic growth in emerging markets was softer in 2015, unemployment in the Eurozone decreased to 11.0%, although although initial signs of stabilisation could be discerned the picture still varies widely from country to country. Spain, towards year-end. The first six months, above all, were over- along with Greece, continues to battle particularly high job- shadowed by some particularly dark economic clouds: Russia less numbers: the unemployment rate for both countries is in and Brazil slipped deeper into recession. Drastic price declines excess of 20%. The rise in consumer prices, on the other hand, on stock markets in China prompted concerns towards the mid- slowed again year-on-year to 0.1%. dle of the year that the Chinese economy, too, might be drawn into a crisis-driven process of adjustment. Even though such a Germany scenario did not materialise in the second half of the year, the The German economy experienced a modest uptick in 2015. pace of growth in the emerging economies was on the mod- In the first half of the year it expanded at rates that reflected erate side. In Russia indications have recently emerged of a the potential output. In the third quarter the pace of growth stabilisation in output. In Latin America, on the other hand, then flagged for a while. Over the year as a whole the economy the situation remained difficult. grew by 1.8%. Expansion continued to be driven by private consumption. The latter benefited from an appreciable rise United States in employment, increasing real wages and the falling price of The positive momentum of the US economy continued to sta- crude oil. Additional factors boosting consumption were the bilise in the past year. Gross domestic product (GDP) added unchanged very low level of interest rates, the introduction of another 0.3 percentage points in 2015 (previous year: 2.2%). the minimum wage and expanded transfer payments. Invest- This was despite the fact that the economy had entered the ment activity was rather slow to pick up, albeit with a rising year with softer growth. The upward revaluation of the dollar tendency towards the end of the year. Exports surged irre- hampered US foreign trade, capital investment contracted and spective of the mediocre pace of global economic growth. The consumption also slowed somewhat initially. Viewed over the recovery in the Eurozone and depreciation of the euro were

30 Hannover Re | Annual Report 2015 major factors here. The German labour market continued to be characterised as expansionary from a historical perspective. improve: on an annual average the working population rose Nevertheless, the Fed had already ended its supportive pur- to a record high of 43 million (+0.8%). The number of unem- chases on the US bond market in the fourth quarter of 2014, ployed dropped below two million in 2015, a decrease of 6.7% whereas the ECB launched just such a programme in March compared to the previous year. 2015 for the European government bond market.

Asia Further modest declines in yields were observed for German Heavily influenced by economic weakness in China and declin- government bonds with shorter maturities, which therefore ing commodity prices, Asia’s emerging markets delivered a continued to deliver negative returns in net terms that extended moderate pace of expansion overall in 2015. In China growth into the medium-term maturity bands. The yield on three-year in the first quarter fell to the lowest level since 2008, trigger- government bonds, for example, retreated over the course of ing significant uncertainties on capital markets over the sum- the year from -0.1% to -0.3%. These declines were facilitated mer. Industrial output nevertheless stabilised over the year as by the anticipation of further active market intervention by the a whole, and the Purchasing Managers’ Index also signalled a ECB as well as by considerable liquidity in the markets and stable development. China consequently registered growth of the search for safe investment opportunities. In the case of 6.8% for 2015. In recent months, however, there have been US Treasuries, modest yield increases were observed in the increasing indications that the economic data does not fully short- to medium-term maturity segments; longer maturities Combined management report capture the slowing economy. The deflation in producer prices, tended to remain stable year-on-year. The return on one-year for example, points to substantial surplus capacities in indus- US Treasuries, for example, rose from 0.2% to 0.6% over the try and in the construction sector. The high indebtedness of course of the year. This increase can be attributed primar- the private sector continues to pose a further problem. Corpo- ily to the expectation among market players that the Fed will rate debt also rose sharply. The sudden slump in share prices make further moves on interest rates. UK gilts saw virtually at the start of the current year would appear to confirm this no changes throughout the period under review. As for the assessment. European nations with higher risk premiums that have been the focus of so much attention in recent years, the picture India further improved its growth rate year-on-year to 7.2%. was again largely one of recovery. Risk premiums on corpo- This was driven principally by the real estate, financial and rate bonds in our main currency areas increased – in some insurance sectors. Nevertheless, the manufacturing sector, gov- instances markedly – as the year progressed owing to devel- ernment spending and private consumption also played a part opments in emerging markets combined with commodity price in this positive trend. movements.

The Japanese economy continued to struggle under soft Stock markets, to which we devoted closer attention again demand from emerging markets in 2015 and its performance due to our decision to start limited rebuilding of an equity was correspondingly weak. The country’s economy recorded portfolio in the third quarter of the period under review, once modest growth of 0.7% over the year as a whole. again soared during the year, in some cases registering new all-time highs; the German market was especially successful Capital markets in booking substantial price gains throughout the year. US The lingering effects of the Euro debt crisis on capital markets indices, on the other hand, were if anything left treading water were merely indirect in 2015. A considerably more important year-on-year. European markets, in particular, were influenced influencing factor was a high degree of uncertainty surround- by the ECB’s continued expansionary monetary policy and by ing a possible turnaround in US interest rates and a further the quest among investors for high-return investments. Ulti- expansion of monetary policy in Europe. The slowing growth mately, though, the elevated price levels could only partially be of the Chinese economy led to a general sense of disquiet explained by the underlying fundamentals. Overall, stock mar- on equity markets. Falling commodity prices due to chang- kets proved broadly robust in the face of diverse crisis warning supply-side structures in an ambiguously evolving global ings. It was only growing concerns about diminishing economic economy were an additional factor. Uncertainty also permeated strength in China combined with slumping commodity prices the assessment of markets for corporate bonds – especially in that triggered a marked downturn on equity markets in August. emerging markets – and led to increased risk premiums. The We were able to turn this to our advantage since we seized the expansionary interest rate policy pursued by central banks in moment to start our already planned rebuilding of an equity our main currency areas – namely the euro and US dollar – portfolio. The development of the world’s economy continues was consequently maintained. Having cut the prime rate for to be subject to a broad range of uncertainties and risks. Most the Eurozone to 0.05% in the previous year, the European notably, the global patchwork of differing economic develop- Central Bank (ECB) kept it at this level throughout the entire ments and local flashpoints such as in the Middle East and period under review. Even though the US Federal Reserve Ukraine may be mentioned here as causal factors. These dis- made its first move to raise interest rates, as had been antici- parities are being further exacerbated by the precipitous fall in pated by many market players, US interest rate policy can still the price of oil, which has a beneficial effect on countries with a

Hannover Re | Annual Report 2015 31 large appetite for energy but jeopardises the budgets of oil-pro- Risk-based solvency systems are currently the focus of atten- ducing nations. The elevated threat of terrorism is another fac- tion worldwide: in China, for example, the Risk Oriented Sol- tor that cannot be ignored, even though the response to it from vency System (C-ROSS) has been adopted and in South Africa capital markets has hitherto been rather robust. the Solvency Assessment and Management (SAM) framework is being implemented. The euro again dropped sharply against the US dollar in the course of the year, slipping from USD 1.22 to USD 1.09. Against In the area of property and casualty reinsurance the prevail- the pound, however, the euro softened at most only slightly ing intense competition was sustained in 2015: in the absence over the full twelve months despite marked volatility within of market-changing large losses insurers continued to enjoy the year. To some extent it was even able to make up ground strong capital resources, hence further supporting the trend lost against the Australian and Canadian dollar in the previous towards increased retentions. At the same time the market for year. This performance can certainly be attributed in part to the collateralised reinsurance products continued to build sub- protracted weakness in commodities and the share of exports stantial capacities and thereby absorbed additional risks that that they account for in the balance of trade of these countries. had hitherto been covered on the reinsurance market. For the reinsurance sector this was accompanied by further pressure For more detailed remarks on the development of Hannover on prices and conditions. To some extent it was possible to Re’s investments please see the “Investments” section on offset this decline through stronger demand resulting from page 51 et seq. preparations for the requirements of Solvency II.

On the product side 2015 once again opened up some intrigu- Industry-specific parameters ing possibilities: increasing digitalisation, for example, stimu- lated demand for protection against cyber risks. The environment facing the international insurance industry remained challenging in 2015: with the general level of interest The life and health reinsurance market is still going through a rates still being extremely low, insurers devoted particularly process of adjustment: in Germany the appeal of traditional life close attention to preserving the value of their investments and insurance policies has continued to diminish in tandem with the the stability of returns. protracted low interest rate environment. In the United King- dom the reform of the Pensions Act in April led to a shake-up One response to the more demanding market conditions in of the pensions market: for those (re)insurance industry play- the insurance sector has been an appreciable increase in the ers covering the longevity risk the reform means that existing number of companies joining forces – whether through merg- insurance solutions must be modified to fit the new conditions. ers, acquisitions or equity investments. According to industry analysts, M&A activities among both insurers and reinsurers Demographic changes around the world are generating were more intensive last year than they had been in a long increased demand for reinsurance protection in the area of lon- time. Within the first nine months alone 15 transactions were gevity solutions. So-called “lifestyle products” are also enjoying documented worldwide. They estimate that this trend will con- a surge in demand: these primarily involve life insurance poli- tinue in 2016. cies under which the premium is linked to the insured’s healthy lifestyle (e. g. fitness, nutrition). These products are especially The insurance industry was again heavily preoccupied in 2015 popular in Australia, South Africa and the United States. with preparations for the new requirements governing financial risk protection. In Europe this takes the form of Solvency II: the The Chinese insurance market continues to grow at an reform of insurance supervision law initiated by the European above-average pace. The new solvency requirements (C-ROSS) Commission entered into force on 1 January 2016 and compels implemented on 1 January 2016 had already been applied P&C and L&H insurers, most significantly, to maintain a higher by insurers on a “trial basis” in 2015. This had an effect on minimum level of own funds. Regulators are allowing a transi- demand patterns for reinsurance solutions. tional period for gradual adoption of the revised methodology that must be used to measure the provisions in order to enable them to progressively build up the required own funds. In this connection a number of large reinsurers have received approval from the Federal Financial Supervisory Authority (BaFin) to use their own internal capital models and are already showing comparatively high capital ratios.

32 Hannover Re | Annual Report 2015 Business development • Highest Group net income in Hannover Re’s history • Very good result in property and casualty reinsurance • Major loss expenditure below the expected level • Further improvement in the profitability of life and health reinsurance delivers pleasing contribution to Group net income • Good investment income despite challenging conditions • Further strengthening of capital base • Return on equity unchanged year-on-year at 14.7%

We are highly satisfied with the development of our business in The underwriting result, which improved by 23.0% to the 2015 financial year. Once again, we succeeded in beating EUR 432.2 million (EUR 351.5 million), was also thoroughly the previous year’s record profit: we booked the highest-ever positive. While expenditure on large losses was higher than in Group net income in company history – at EUR 1,150.7 mil- the previous year, it remained within the budgeted amount of Combined management report lion (previous year: EUR 985.6 million) – and surpassed the EUR 690 million at EUR 572.9 million (EUR 425.7 million). The one billion euro threshold for the first time. All business groups combined ratio stood at 94.4% and was thus better than our played a part in this result, which is all the more gratifying in targeted level of below 96%. The operating profit (EBIT) as at view of the fact that market conditions for reinsurers remain 31 December 2015 surged by 12.6% to EUR 1,341.3 million challenging and the protracted low level of interest rates is also (EUR 1,190.8 million). The EBIT margin amounted to 16.6% limiting our scope to generate returns on the investment side. (17.0%), thereby again comfortably beating our minimum tar- While Group net income was assisted by major loss expendi- get of at least 10%. This is a reflection of the very good perfor- ture below the planned budget and a positive special effect in mance in property and casualty reinsurance. Group net income life and health reinsurance, the strength of the result is also increased by 10.3% to EUR 914.7 million (EUR 829.1 million). borne out by the sustained very good confidence level of our loss reserves. Gross premium by business group M 04 in EUR million Please find below a brief summary of the development of our two business groups – Property & Casualty and Life & Health 2000020,000 reinsurance – and our investments. More detailed information 17,069 is to be found on pages 35 to 52.

14,362 1500015,000 13,774 13,963 Property & Casualty reinsurance 12,096 7,731

6,459 6,058 6,145 Despite the fiercely competitive state of the market we are sat- 1000010,000 5,270 isfied with the development of our business in property and casualty reinsurance. Even though rates in most markets continued to decline, our positioning as a financially robust rein- 50005,000 surer enabled us to act on opportunities for profitable growth, 9,338 7,717 7,818 7,903 as a consequence of which premium income in the year under 6,826 review grew more strongly than had been anticipated. Gross premium increased by 18.2% as at 31 December 2015 to 0 0 2011 2012 2013 2014 2015 EUR 9.3 billion (EUR 7.9 billion). At constant exchange rates the increase would still have been as much as 8.1%. Property & Casualty reinsurance Life & Health reinsurance

Investment income from assets under own management rose by 12.3% year-on-year to EUR 924.8 million (EUR 823.2 million). It is particularly gratifying to note that ordinary income was higher than in the previous year despite the protracted low interest rate environment. This can be attributed in part to increased income from real estate and fixed-income securities, although special effects associated with our private equity investments were also a factor here.

Hannover Re | Annual Report 2015 33 Life & Health reinsurance Even though interest rates remained low, ordinary investment income excluding interest on funds withheld and contract Life and health reinsurance business delivered another solid deposits came in 17.3% higher than the level of the previ- contribution to the successful result posted by the Group in the ous year at EUR 1,253.4 million (EUR 1,068.4 million). Inter- year just ended. The general business climate remained com- est on funds withheld and contract deposits improved from petitive, especially in mature life insurance markets. We were EUR 376.1 million to EUR 395.0 million. nevertheless able to identify potential new business opportunities for our long-standing clients based on our proven, Net realised gains on investments as at 31 December 2015 partnership-based approach and we additionally acquired new remained below the previous year’s rather high figure at customers through active marketing efforts, attractive condi- EUR 135.8 million (EUR 182.5 million). Write-downs were tions and comprehensive service support. This had favourable once again taken in only a minimal volume in the year under implications for our gross premium income: gross premium review, the vast bulk of them being due to scheduled depreci- increased in the reporting period just ended to EUR 7.7 billion ation on real estate. Income from assets under own manage- (EUR 6.5 billion), equivalent to growth of 19.7%. Adjusted for ment showed pleasing growth to reach EUR 1,270.1 million exchange rate effects, the growth of 9.5% exceeded our tar- (EUR 1,095.8 million). The resulting annual return (excluding get growth range for gross premium of between 5% and 7%. ModCo derivatives and inflation swaps) amounted to 3.5% Similarly, at EUR 542,6 million we also beat our planned target (3.3%). It thus clearly beats our anticipated figure of 3.0%. of more than EUR 180 million for the Value of New Business Along with increased earnings from fixed-income securities, in the year under review. this was due to higher income from alternative investments such as real estate and private equity as well as a special Our investment income grew by 15.5% in the year under effect in life and health reinsurance. We also benefited from review to EUR 709.2 million (EUR 614.2 million). Of this, movements in exchange rates. Investment income including EUR 334.3 million (EUR 258.5 million) was attributable to interest on funds withheld and contract deposits consequently assets under own management; the remaining EUR 374.9 mil- increased to EUR 1,665.1 million (EUR 1,471.8 million), a rise lion (EUR 355.7 million) derived from securities deposited with of 13.1% relative to 2014. ceding companies.

The operating profit (EBIT) reached an extremely satisfactory Total result level of EUR 405.1 million (EUR 263.8 million). The EBIT margins within the individual reporting categories developed as The gross premium in our total business increased substan- follows: for mortality and morbidity business we fell short of tially by 18.8% as at 31 December 2015 to EUR 17.1 billion the 6% target with an EBIT margin of 3.6%. Longevity busi- (EUR 14.4 billion). At constant exchange rates the increase ness reached its targeted EBIT margin of 2.0% at 4.5%. In would have been 8.7%. This puts us at the upper end of our the financial solutions reporting category we booked another guidance – which we had raised after the second quarter – for exceptionally good result. The generated EBIT margin of 18.1% currency-adjusted growth in the range of five to ten percent clearly exceeded the target margin of 2%. The life and health for 2015. The level of retained premium edged lower to 87.0% reinsurance segment thus posted very good Group net income (87.6%). Net premium earned rose 17.5% to EUR 14.6 billion of altogether EUR 289.6 million (EUR 205.0 million) in the (EUR 12.4 billion). At unchanged exchange rates growth would financial year just ended. This represents an increase of 41.3%. have come in at 7.9%.

We are highly satisfied not only with the pleasing premium Investments growth but also with the business results in the year under review. The operating profit (EBIT) climbed a further 19.7% Bearing in mind the protracted low interest rate environment, compared to the already very good previous year to reach we are highly satisfied with the development of our total invest- EUR 1,755.2 million (EUR 1,466.4 million). Group net income ments as at 31 December 2015. The portfolio of investments surged by 16.7% to EUR 1,150.7 million (EUR 985.6 million). under own management stood at EUR 39.3 billion and was We thus beat both our original guidance of EUR 875 million thus higher than the comparable level at the end of the previ- and the revised guidance of around EUR 950 million released ous year (31 December 2014: EUR 36.2 billion). This increase mid-year. Earnings per share for the Hannover Re Group derived in large measure from positive exchange rate effects, amounted to EUR 9.54 (EUR 8.17). especially associated with the strong US dollar, but was also due to a pleasing positive operating cash flow. The decline in The development of our shareholders’ equity was also once valuation reserves, which resulted primarily from the flatten- again highly satisfactory: driven by the increase in retained ing of the US yield curve and higher credit spreads on corpo- earnings, the equity attributable to shareholders of Hannover rate bonds, served as a restraining factor in this development. Re rose by 6.9% relative to the position at year-end 2014 to

34 Hannover Re | Annual Report 2015 reach EUR 8.1 billion (EUR 7.6 billion) despite a reduction shareholders’ equity. The book value per share was also sharply of 9.2% in other comprehensive income. This decrease was higher, reaching its highest-ever level to date at EUR 66.90 due to declines in valuation reserves owing to higher interest (EUR 62.61). All in all, Hannover Re achieved and in some rates and increased risk premiums on corporate bonds, which cases clearly exceeded the forecasts provided for the 2015 were not entirely offset by positive exchange rate effects. The financial year as shown in the following table “Business devel- change in the average shareholders’ equity – calculated on opment in the year under review”. the basis of the respective average shareholders’ equity for the 2014 and 2015 financial years – showed an increase of as The total policyholders’ surplus, consisting of shareholders’ much as 16.2%. The return on equity nevertheless remained equity, non-controlling interests and hybrid capital, amounted unchanged at 14.7% (14.7%). This shows that the increase to EUR 10.3 billion (EUR 10.2 billion) as at 31 December 2015. in Group net income was able to keep pace with the growth in

Business development in the year under review M 05

Forecast 2015 Target attainment 2015 Gross premium growth (Group) stable to slightly higher gross premium +8.7% at constant exchange rates volume / growth of 5 – 10% 1, 5 +18.8% not adjusted for currency effects Combined management report Gross premium growth for stable 1 +8.1% at constant exchange rates Property & Casualty reinsurance +18.2% not adjusted for currency effects Gross premium growth for slight increase 1, 2 +9.5% at constant exchange rates Life & Health reinsurance +19.7% not adjusted for currency effects Return on investment 3 ≈ 3.0% 3.5% Group net income ≈ EUR 875 Mio. / EUR 950 million 4, 5 EUR 1,150.7 million

1 At constant exchange rates 2 Organic growth only 3 Excluding ModCo derivatives and inflation swaps 4 Assuming stable capital markets and / or major loss expenditure in 2015 that does not exceed EUR 690 million 5 In the context of publication of the half-year results for 2015 the forecast Group net income was raised to EUR 950 million and the forecast gross premium growth (Group) was specified more closely at 5 – 10% at constant exchange rates

Overall assessment of the business position

The Executive Board of the Hannover Re Group is very satis- low level of interest rates. Group net income rose to the high- fied with the development of business in 2015. Not only did est level ever recorded in the company’s history at more than the company achieve its targets for important key indicators EUR 1 billion. The company’s shareholders’ equity also showed such as the operating profit (EBIT) and Group net income, a very pleasing increase, as a consequence of which the total return on equity and combined ratio, in some cases it also policyholders’ surplus surpassed the previous year’s record clearly surpassed them. This is all the more gratifying given figure to reach a new all-time high. At the time of preparing that the business environment for reinsurers remains intensely the management report, the business position of the Hannover competitive. The investment income and the generated return Re Group remains highly favourable and its financial strength on investment developed successfully despite the continued has been further reinforced.

Results of operations

In the following sections we discuss the development of the financial year in our two strategic business groups, namely Property & Casualty reinsurance and Life & Health reinsurance, as well as the performance of our investments and the financial position and assets of our Group. Supplementary to the information provided here, the segment reporting in Section 5 of the notes to this Annual Report shows the key balance sheet items and profit components of the two business groups.

Hannover Re | Annual Report 2015 35 Property & Casualty reinsurance at a glance

Gross written premium in P&C reinsurance M 06 Geographical breakdown of gross written premium M 07 in EUR million in 2015

3.0% Africa 1.8% Australia 1000010,000 9,338 6.6% Latin America 31.3% 9.5% North America 7,717 7,818 7,903 United Kingdom 8,000 8000 3,492 6,826

2,471 2,467 2,708 12.1% Germany 60006,000 2,342 18.3% 17.4% Asia Rest of Europe 2,920 40004,000 2,725 2,717 2,576 2,289

20002,000 2,926 2,634 2,619 2,194 2,521

0 0 2011 2012 2013 2014 2015

Target markets Specialty lines worldwide Global reinsurance

Breakdown of proportional and non-proportional M 08 Breakdown into business written through brokers M 09 treaties by volume and direct business in % and in EUR million in % and in EUR million

1000010,000 9,338 1000010,000 9,338

7,903 7,903 7,717 7,818 3,235 7,717 7,818 3,195 80008,000 (35%) 80008,000 (34%) 6,826 6,826 2,459 2,878 2,450 2,880 3,066 (31%) 2,807 (36%) (32%) (37%) (39%) (36%) 60006,000 60006,000 2,526 2,517 (37%) (37%)

40004,000 40004,000

6,103 6,143 (65%) 5,359 (66%) 4,837 4,752 5,025 5,267 (69%) 5,096 4,309 (63%) (61%) (64%) (68%) (64%) 20002,000 (63%) 20002,000 4,300 (63%)

00 0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

proportional non-proportional business written through brokers direct business

36 Hannover Re | Annual Report 2015 Property & Casualty reinsurance

• Highest-ever Group net income of EUR 914.7 million • Major loss expenditure lower than expected at EUR 572.9 million • Pleasing combined ratio of 94.4% • Growth of 18.2% in gross premium; currency-adjusted premium growth of 8.1% above the medium-term target corridor of 3 – 5%

Accounting for 55% of our premium volume, Property & Casualty We are broadly satisfied with the outcome of the various rounds reinsurance is Hannover Re’s largest business group. It is struc- of treaty renewals during the year under review. The largest tured according to our Board areas of responsibility, namely business volume is traditionally renewed on 1 January, the date “Target markets”, “Specialty lines worldwide” and “Global in 2015 when almost two-thirds of our treaties were renegoti- reinsurance”. ated. While rate reductions and in some instances deteriorations in conditions were observed in many markets, it was also Property and casualty reinsurance once again proved to be possible to obtain rate increases under treaties that had been intensely competitive in the 2015 financial year. In the absence impacted by losses in 2014. This was especially true of our Combined management report of market-changing losses, ceding companies continue to enjoy domestic German market. Rates in the aviation line developed strong capital resources, prompting some of our clients to pass less favourably despite significant losses. Rate movements were on fewer risks to the reinsurance market. On the other hand, still limited on account of the continued abundant availability we noted increased demand for additional reinsurance cover- of insurance capacity, prompting us to scale back our premium age. As a further factor, the inflow of capital from the market volume in this line. All in all, our portfolio remained stable. for catastrophe bonds (ILS) – especially in US natural catastrophe business – added to the premium erosion. As the year pro- By and large, this trend was sustained in the treaty renew- gressed, however, a reduction in the oversupply of reinsurance als during the year, although isolated indications of a stabi- capacity could be discerned relative to the previous year. Most lisation in reinsurance prices could be detected. With this in significantly, the resurgent US economy sent out positive sig- mind, we were also satisfied with the renewals as at 1 June and nals for the premium trend in mature markets. 1 July 2015 – the dates when, most notably, parts of our North American portfolio, agricultural risks and business from Latin Based on our profit-oriented underwriting policy, we are America come up for renewal. Hannover Re successfully grew well placed to handle the challenging market conditions. It its business at adequate rates. This was also the main renewal remains the case that we expand our portfolio only in areas season for business in Australia, which passed off highly suc- where margins are commensurate with the risks. In regions cessfully for Hannover Re thanks to the enlarged market share and lines where prices fail to satisfy our profitability require- secured with long-standing customers. ments, however, we systematically reduce our shares. This strategy of active cycle management enables us – despite soft market conditions – to largely preserve the high rate quality of our portfolio.

Key figures for Property & Casualty reinsurance M 10

2015 + / – 2014 2013 2012 1 2011 previous in EUR million year Gross written premium 9,338.0 +18.2% 7,903.4 7,817.9 7,717.5 6,825.5 Net premium earned 8,099.7 +15.5% 7,011.3 6,866.3 6,854.0 5,960.8 Underwriting result 432.2 +23.0% 351.5 335.5 272.2 (268.7) Net investment income 945.0 +12.0% 843.6 781.2 944.5 845.4 Operating result (EBIT) 1,341.3 +12.6% 1,190.8 1,061.0 1,091.4 599.3 Group net income 914.7 +10.3% 829.1 807.7 685.6 455.6 Earnings per share in EUR 7.58 +10.3% 6.88 6.70 5.68 3.78 EBIT margin 2 16.6% 17.0% 15.5% 15.9% 10.1% Retention 89.3% 90.6% 89.9% 90.2% 91.3% Combined ratio 3 94.4% 94.7% 94.9% 95.8% 104.3%

1 Adjusted pursuant to IAS 8 2 Operating result (EBIT) / net premium earned 3 Including expenses on funds withheld and contract deposits

Hannover Re | Annual Report 2015 37 All in all, Hannover Re once again benefited in the year under These and other large losses resulted in net major loss review from its enduring customer relationships as well as its expenditure for our company totalling EUR 572.9 million position as one of the leading and most financially robust rein- (EUR 425.7 million). While this figure is well above that of surance groups in the world. the previous year, it still came in below our budgeted level of EUR 690 million. For a detailed list of our catastrophe and Against this backdrop, the total gross premium in the year large losses please see page 85. under review climbed by a substantial 18.2% to EUR 9.3 billion (previous year: EUR 7.9 billion); at constant exchange The combined ratio of 94.4% (94.7%) in the year under rates growth would have reached 8.1%. We thus beat our review was better than the target mark of 96%. The under- guidance, which had anticipated a stable currency-adjusted writing result (including expenses on funds withheld and con- premium volume. The level of retained premium decreased tract deposits) improved again on the previous year to reach to 89.3% (90.6%). Net premium earned increased by 15.5% EUR 452.4 million (EUR 371.9 million). to EUR 8.1 billion (EUR 7.0 billion); growth would have been 6.4% at constant exchange rates. Investment income in property and casualty reinsurance climbed by a pleasing 12.0% to EUR 945.0 million (EUR 843.6 million). As in the previous years, the burden of major losses that we The operating profit (EBIT) reached a new record level in the incurred remained moderate: the hurricane season in North year under review of EUR 1,341.3 million (EUR 1,190.8 million), America and the Caribbean once again passed off thoroughly equivalent to growth of 12.6%. The EBIT margin stood at 16.6% unremarkably in 2015. However, an increased number of (17.0%) and thus comfortably surpassed our minimum target of natural disasters was recorded, including for example flood- 10%. Group net income improved by 10.3% to EUR 914.7 mil- ing in the UK and the storm “Niklas” in Europe. There was lion (EUR 829.1 million). Earnings per share stood at EUR 7.58 also a spate of man-made losses. The largest single loss for the (EUR 6.88) for this business group. insurance industry and hence also for our company was the devastating series of explosions at the port of the Chinese city On the following pages we report in detail on developments of Tianjin in August 2015. This gave rise to loss expenditure in the individual markets and lines of our Property & Casualty of EUR 111.1 million for our net account. reinsurance group, split into the three areas of Board responsibility referred to at the beginning of this section.

Property & Casualty reinsurance: Major loss trend 1 M 11 in EUR million

20002,000 1,730

15001,500

981 10001,000 863 714 724 559 573 672 662 662 578 478 670 690 291 625 240 458 530 560 500 410 285 500 426 500 428 450 378 360 121 107 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gross Net Net expectation for major losses 1

1 Natural catastrophes and other major losses in excess of EUR 10 million gross (until 31 December 2011: in excess of EUR 5 million gross)

38 Hannover Re | Annual Report 2015 Property & Casualty reinsurance: Key figures for individual markets and lines in 2015 M 12

Gross Change in gross Gross EBIT in Combined Maximum premium premium relative premium EUR million ratio tolerable 2015 in to previous year 2014 in combined ratio EUR million EUR million (MtCR) Target markets 2,925.5 +11.7% 2,619.4 445.2 99.0% 96.5% North America 1,493.8 +23.1% 1,213.4 242.0 99.6% 99.2% Continental Europe 1,431.7 +1.8% 1,406.1 203.2 98.4% 94.4% Specialty lines worldwide 2,920.4 +13.4% 2,575.6 518.5 90.9% 97.5% Marine 297.1 +5.9% 280.6 112.3 60.0% 91.3% Aviation 377.3 +3.7% 364.0 70.5 93.6% 99.3% Credit, surety and political risks 605.6 +14.0% 531.4 63.7 98.9% 96.9% UK, Ireland, London market and direct business 519.7 +17.6% 442.0 153.7 86.6% 98.7% Facultative reinsurance 1,120.7 +17.0% 957.6 118.3 94.1% 96.9%

Global reinsurance 3,492.1 +28.9% 2,708.4 377.7 93.1% 94.8% Combined management report Worldwide treaty reinsurance 1,810.4 +22.3% 1,480.7 165.7 95.7% 94.7% Catastrophe XL (Cat XL) 374.9 +20.9% 310.0 154.6 50.2% 82.2% Structured reinsurance and Insurance-linked securities 1,306.8 +42.4% 917.7 57.4 98.4% 98.9%

Target markets North America Hannover Re classifies North America and Continental Europe The North American (re)insurance market is the largest single as target markets. The premium volume increased by 11.7% to market both worldwide and for Hannover Re. Our business here EUR 2,925.5 million (EUR 2,619.4 million). Growth thus came is written almost exclusively through brokers. in stronger than originally forecast. The combined ratio slipped from 92.5% to 99.0%, as a consequence of which the oper- The continued moderate growth of the US economy in 2015 ating profit (EBIT) retreated accordingly to EUR 445.2 million served to boost the premium volume in the primary insurance (EUR 507.6 million). market; the rate level, which had been rising since 2011, stabilised on the level of the previous year. Given the continued Property & Casualty reinsurance: M 13 absence of significant natural catastrophe events in the United Breakdown of gross written premium in target markets States and with low inflation rates offering room to write back in EUR million reserves, both insurance and reinsurance companies were able to show healthy profits. 2,926 3,0003000 2,634 2,619 The more comfortable capital resources available to market 2,521 players and the additional risk-carrying capacity offered by 2,5002500 2,194 1,432 alternative capital led to renewed pressure on reinsurance rates, albeit to a lesser extent than had originally been antici 2,0002000 1,457 1,406 pated. Proportional property business was broadly stable, 1,397 although conditions deteriorated in some areas. Rates in 1,5001500 1,309 non-proportional US catastrophe business fell in response to the inflow of capacity from alternative markets and on account 1,0001000 of higher retentions carried by ceding companies, although the

1,494 pace of erosion slowed. 1,213 1,124 1,177 500500 885 Loss-impacted programmes saw positive price adjustments. Although general liability business came under heavier rate 0 0 2011 2012 2013 2014 2015 pressure, as reflected in coverage extensions and more gen- erous limits of liability as well as increased cost reimburse- North America Continental Europe ments, rate increases were booked in some instances in the

Hannover Re | Annual Report 2015 39 professional indemnity lines. Greater awareness of cyber risks Property & Casualty reinsurance: Breakdown of gross M 15 led to stronger demand. Opportunities also opened up in the written premium in Continental Europe by line of business reinsurance of M & A activities. In addition, we were able to further enlarge our business relationship with a long-standing 8.7% Other customer in the context of a large-volume treaty. 37.1% Property

Hannover Re is very well positioned in the North American market and thanks to its excellent rating, its financial stand- 30.0% Motor ing and its experience the company is a valued partner for its clients. Especially in long-tail liability business, this is of the utmost importance. Thanks to our access to the entire market 24.2% Liability spectrum, we were particularly successful in further diversifying our portfolio and writing additional profitable business in the financial year just ended. Germany On the claims side North America experienced a number of The German market – the second-largest in the world for smaller natural catastrophe events, which resulted in merely property and casualty reinsurance – is served within the Han- moderate losses for reinsurers. This was particularly the case nover Re Group by our subsidiary E+S Rück. As the “dedi- with the hurricane season, which again passed off thoroughly cated reinsurer for Germany”, the company is a sought-after benignly in the year under review. Hannover Re incurred size partner thanks to its very good rating and the continuity of able losses in the United States from, inter alia, the winter storm its business relationships. E+S Rück is superbly positioned in February (EUR 12.8 million), forest fires (EUR 9.3 million) in its domestic market and a market leader in property and as well as a storm and flooding in May / June (EUR 7.3 million). casualty reinsurance.

Property & Casualty reinsurance: Breakdown of gross M 14 The German market was similarly shaped by oversupply on written premium in North America by line of business the reinsurance market, putting pressure on conditions – especially in short-tail business. Furthermore, ceding companies 8.7% Motor 0.2% Other are raising their retentions in order to meet internal cost pressure – especially associated with regulatory requirements such as Solvency II.

43.1% Liability 48.0% Property Loss expenditure caused by natural disasters was slightly higher than in the previous year, driven above all by winter storm “Niklas” in late March / early April. The German Insurance Association (GDV) estimates that losses from natural catastrophe events cost the insurance industry around EUR 2.1 billion. Roughly one third of the total loss burden can Despite the competitive climate and our margin-oriented be attributed to winter storm “Niklas”, which – with damage underwriting policy, the gross premium for our business to insured buildings put at EUR 750 million – ranks among the in North America rose by 23.1% to EUR 1,493.8 million five most severe winter storms since 1997. (EUR 1,213.4 million). Adjusted for exchange rate effects, North American business booked growth in the mid-single-digit per- The diverging developments in property and casualty insur- centage range. The combined ratio deteriorated in the year ance in Germany became even more marked in the year under under review to 99.6% (91.8%). The operating profit (EBIT) review: while the premium quality in retail lines improved, fell to EUR 242.0 million (EUR 258.2 million). especially in motor and homeowners business, industrial lines – above all fire insurance – remained fiercely competitive. Continental Europe A further factor is that loss ratios here have been rising stead- We group together the markets of Northern, Eastern and ily since the beginning of the decade and no further under- Central Europe as Continental Europe. The largest single writing profits have been generated market-wide. Not only market here is Germany. The premium volume for our busi- were very large individual losses (in some cases more than ness in Continental Europe in the year under review came in at EUR 250 million) recorded in 2015, the number of claims also EUR 1,431.7 million (EUR 1,406.1 million). The combined ratio increased sharply. stood at 98.4% (93.1%). The operating profit (EBIT) amounted to EUR 203.2 million and thus fell short of the previous year’s good performance (EUR 249.4 million).

40 Hannover Re | Annual Report 2015 Claims expenditure in motor own damage insurance was in Specialty lines worldwide line market-wide with the multi-year average. Despite tariff Under specialty lines we include marine and aviation rein- improvements in the primary market, the increased loss burden surance, credit and surety reinsurance, business written on compared to the previous year caused the combined ratio to the London Market as well as direct business and facultative deteriorate slightly. Using highly specialised analysis tools, reinsurance. we assist our customers with the individual exposure mapping of their own damage portfolios and draw on these insights to The premium volume for specialty lines amounted to develop bespoke reinsurance solutions. EUR 2,920.4 million (EUR 2,575.6 million) in the year under review. The combined ratio improved from 100.2% to 90.9%. Premium income from motor liability insurance rose again in The operating profit (EBIT) for specialty lines surged to 2015 – on the back of modest tariff increases in the previous EUR 518.5 million (EUR 169.4 million). years. Allowing for the run-off from previous years, the combined ratio for the year as a whole is likely to reach a level of Property & Casualty reinsurance: Breakdown of gross M 16 roughly 100% market-wide. General liability business in Ger- written premium in worldwide specialty lines in EUR million many will similarly see the technical income statement close in positive territory. Growing demand could be observed here 2,920 for cyber covers, although the associated premium volume is 30003,000 2,725 2,717 Combined management report still very minimal. All in all, we are satisfied with the premium 2,576 contribution from our German business. 2,500 2500 2,289 752 1,121 869 Rest of Continental Europe 958 20002,000 603 European markets are still intensely competitive; this is true not only of countries in Central and Eastern Europe but also 641 561 15001,500 520 of most mature markets such as France and Northern Europe. 495 442 Along with difficult economic conditions, surplus capacities put the insurance industry under strain; rate reductions and poorer 10001,000 611 593 606 579 531 conditions were therefore once again a feature of the Northern

European and French markets, especially in the industrial lines. 500 414 402 377 500 379 364 We nevertheless succeeded in maintaining our market share, in part by increasing our shares with selected cedants and also 233 307 293 281 297 00 by writing additional business in less competitive lines. In long- 2011 2012 2013 2014 2015 tail liability business, especially on the motor side, we are still Marine Aviation Credit, surety and political risks seeing a challenging climate and participate only selectively. UK, London market and direct business Developments in Central and Eastern Europe were over- Facultative reinsurance shadowed by political tensions and the associated economic impacts. The primary insurance market consequently saw a contraction in premium income, with corresponding implica- Marine tions – exacerbated by the competition – for the reinsurance After years of satisfactory rates, the marine reinsurance mar- market. In the year under review, however, it was largely pos- ket is currently experiencing a soft market phase. In the treaty sible to obtain risk-appropriate rates and conditions and hence renewals at the beginning of 2015 price declines running into we were able to generate satisfactory results with a somewhat double-digit percentages were recorded as a consequence of smaller premium volume. On the claims side the region was the relatively low expenditure on marine losses. The insurance impacted by numerous small and mid-sized events. market for offshore energy risks has been facing substantial surplus capacities for around 18 months now. The drop in oil prices has also cut into demand. Despite some strains from man-made losses, reinsurance prices for coverage of such risks therefore continued to decline.

Hannover Re | Annual Report 2015 41 In 2015 the series of explosions in the Chinese port city of Credit, surety and political risks Tianjin caused a market loss in the range of USD 2 to 3 billion, Hannover Re ranks among the market leaders in worldwide a not inconsiderable part of which impacted marine reinsur- credit and surety reinsurance. ance. The net loss for our share across all lines amounted to EUR 111.1 million. Further large losses incurred in the market While the development of the worldwide economy in 2015 can were attributable principally to damaged oil rigs in the Gulf of be described as robust overall, economic conditions in certain Mexico. We therefore adjusted our underwriting policy along regions – including for example in Southern Europe, emerging more conservative lines and relinquished business that offered markets and especially China – were difficult. Global growth in little prospect of profitability. the primary insurance market therefore remained minimal. The increased risk-carrying capacity of ceding companies has led to Driven in part by positive exchange rate effects, gross premium a drop in reinsurance cessions in some areas. We write a large for our marine portfolio increased by 5.9% to EUR 297.1 million share of our business with credit, surety and political risks in (EUR 280.6 million). Despite the aforementioned loss expend- the form of proportional treaties, under which cost reimburse- iture the combined ratio improved to 60.0% (67.2%) and the ments in the year under review increased only moderately. underwriting result moved correspondingly higher. The operating profit (EBIT) climbed to EUR 112.3 million (EUR 85.7 million). Gross premium income in these lines grew by 14.0% in 2015 to EUR 605.6 million (EUR 531.4 million). The premium growth Aviation was boosted by exchange rate effects, the acquisition of new Results in international aviation (re)insurance were once again customers and the expansion of existing client relationships. impacted in the year under review by a number of losses, including what investigations currently indicate was the delib- The claims frequency in credit and surety business increased erate crash of a German aircraft. At the same time, the space considerably in the year under review, most strikingly in market was faced with the largest single loss in its history. emerging markets. A few sizeable insolvency losses were also recorded, including for example a Spanish engineering and The significant major losses recorded in 2014 had only a very energy group. The loss ratio in political risk insurance also limited positive effect on the rate trend in 2015. This can be rose slightly from a low level. The combined ratio of 98.9% attributed above all to the unchanged abundant supply of insur- for the entire segment was thus significantly higher than in the ance capacity. Rate increases in the market for war covers sim- previous year (92.2%) and exceeded our maximum tolerable ilarly fell short of expectations. We adhered to our disciplined target ratio of 96.9%. The operating profit (EBIT) contracted underwriting strategy in this soft market phase and kept a clear by 26.9% to EUR 63.7 million (EUR 87.2 million). focus on non-proportional business. In this segment we operate as one of the market leaders, in contrast to our selective United Kingdom, London market and direct business stance on writing proportional acceptances. United Kingdom, Ireland and the London Market The property and casualty business that we reinsure for com- The premium volume for our total aviation portfolio rose slightly panies in the United Kingdom and on the London market devel- from EUR 364.0 million in the previous year to EUR 377.3 mil- oped largely satisfactorily in 2015. The intense competition in lion. Total expenditure on large losses was lower than in the the primary sector was sustained and led to rate reductions. previous year at EUR 51.3 million; the combined ratio conse- Exceptions here were UK motor business and parts of the Irish quently improved to 93.6% (112.1%) and came in below the primary insurance portfolio. On the reinsurance side a similar target level for the maximum tolerable combined ratio (99.3%). picture emerged. While rates in non-proportional UK business The operating result (EBIT) improved to EUR 70.5 million remained stable or rose slightly at the beginning of 2015 – after (-EUR 2.4 million). sometimes appreciable increases in the years from 2011 to 2014 –, they came under more pronounced pressure in the other property and casualty lines. We managed our portfolio in keeping with our cycle management and scaled back our shares in programmes under which the prices or conditions were not considered attractive. Major losses were incurred in the form of severe flooding in the United Kingdom, for which we reserved an amount of EUR 28.3 million, as well as fire losses in a number of markets including France and Northern Europe.

42 Hannover Re | Annual Report 2015 Direct business We are largely satisfied with the development of our overall We also write direct business through our subsidiary Interna- facultative portfolio in the year under review, despite the pro- tional Insurance Company of Hannover SE (Inter Hannover). tracted soft market environment: we grew our business and This essentially involves tightly defined portfolios of niche or further diversified the portfolio. The premium volume increased other non-standard business that complements our principal to EUR 1,120.7 million (EUR 957.6 million). The organic growth commercial activity as a reinsurer. was favourably influenced by a strong US dollar and a non-recurring special effect associated with a modified method for We transformed the company into a Societas Europaea (SE) in calculating and deferring premiums from reinsurance treaties 2014 and moved its registered office to Hannover at the begin- that have still to be brought to account. An unusually high fre- ning of 2015. The purpose was to interlink more closely the quency of mid-sized losses was incurred from various regions business management units and to leverage potential synergies and lines in the 2015 financial year. The combined ratio was and economies of scale in the administration of the business. particularly heavily impacted by damage to oil exploration We write a large portion of our direct business in the London equipment in the Gulf of Mexico and refineries, although fire Market and through our Swedish branch. The result of our losses at industrial facilities and some isolated liability claims direct business was significantly improved in the financial year were also contributory factors. Major losses nevertheless did just ended. This is a respectable achievement, especially bear- not reach the level of the previous year. The combined ratio ing in mind the intensive competition among the insurers and of 94.1% was below that of the previous year (103.9%). The Combined management report reinsurers operating in this sector. operating profit (EBIT) improved accordingly to EUR 118.3 million (EUR 11.8 million). The gross premium booked from the United Kingdom, London market and direct business climbed – as indicated in the renew- Global reinsurance als as at 1 January 2015 – by 17.6% from EUR 442.0 million We combine all markets worldwide under global reinsurance to EUR 519.7 million. A good portion of the growth was driven with the exception of our target markets and specialty lines. by positive exchange rate effects. The combined ratio stood at This segment also encompasses global catastrophe busi- 86.6% (110.3%). The operating result (EBIT) improved accord- ness, the reinsurance of agricultural risks, Sharia-compli- ingly to EUR 153.7 million (-EUR 12.8 million). ant retakaful business as well as structured reinsurance and insurance-linked securities. Facultative reinsurance In contrast to obligatory reinsurance, a reinsurer underwrites The premium volume increased by 28.9% in the year under primarily individual risks in facultative business. The general review to EUR 3,492.1 million (EUR 2,708.4 million). The com- environment for both types of reinsurance in the various mar- bined ratio deteriorated slightly from 91.6% to 93.1%. The kets is, however, for the most part comparable. operating profit (EBIT) declined from EUR 513.8 million to EUR 377.7 million. Heavy rate erosion and diminished demand for coverage of offshore and onshore risks were all but offset by increased Property & Casualty reinsurance: M 18 acceptances in the areas of renewables, cyber risks and per- Breakdown of gross written premium in global reinsurance in EUR million sonal accident / sports covers. Yet even in these segments the effects of the soft market could be felt. Rate movements therefore varied across regions and markets, although the overall 3,492 3,500 trend was still downwards. 3500

30003,000 Property & Casualty reinsurance: Breakdown of gross M 17 2,708 1,307 written premium in facultative reinsurance 2,471 2,467 25002,500 2,342 918 10.7% Other 735 618 2,000 375 2000 766

12.5% Motor 372 310 1,500 358 1500 299 44.4% Property 1,000 1000 1,810 1,478 1,481 1,378 1,277 32.4% Liability 500500

0 2011 2012 2013 2014 2015

Worldwide treaty reinsurance Catastrophe XL Structured reinsurance and ILS

Hannover Re | Annual Report 2015 43 Worldwide treaty reinsurance In China Hannover Re once again booked double-digit growth We are satisfied with the development of our worldwide treaty in the year under review. We are present in the country with reinsurance portfolio. The gross premium volume grew in line a locally licensed branch and have systematically pursued the with our expectations to EUR 1,810.4 million (EUR 1,480.7 mil- successful strategy of the previous years – namely consolidating lion). The combined ratio improved from 98.5% to 95.7%. our business relationships with selected clients. Our business The operating profit (EBIT) retreated to EUR 165.7 million already benefited in the year under review from the upcom- (EUR 225.6 million). ing implementation of the risk-based solvency system C-ROSS effective 1 January 2016, which favours local reinsurance place- Property & Casualty reinsurance: Breakdown of gross M 19 ments. Results were, however, hard hit by the extraordinary written premium in worldwide treaty reinsurance series of explosions at the Port of Tianjin; the insured market loss from this accident is estimated to be in the range of EUR 2 9.2% Other to 3 billion.

Almost all primary insurance markets in South and Southeast 20.8% Motor Asia are growing disproportionately strongly compared to the 64.8% Property more mature Asian markets. In this region Hannover Re is represented by a branch in Kuala Lumpur. We further improved 5.2% Liability our market penetration and generated strong growth in the year under review. In keeping with our strategy, the prevailing conditions – which were shaped by the intense competitive forces – prompted us to successfully expand new, less hard- fought business segments and optimise our risk balance. Asia-Pacific region The Asia-Pacific countries continue to be a growth region After the Indian government had opened the way in 2015 for for Hannover Re, and with this in mind we further expanded foreign reinsurers to set up branches, we embarked on inten- our position in the year under review. Developments in the sive preparations for the licensing process. In so doing, we individual markets varied widely; the region was the scene are aiming to strengthen our market presence and boost our of increasing competition on account of the available growth growth prospects. opportunities. Although the loss expenditure incurred in certain markets was striking, it can still be assessed as satisfac- In Australia and New Zealand, contrary to expectations, Han- tory overall. nover Re achieved vigorous growth by realising sizeable transactions with a number of target customers. In the first half of Japan remains one of the most important regional markets in 2015 the region was impacted by an unusual frequency of mid- the Asia-Pacific for the Hannover Re Group. The year under sized and smaller natural catastrophe losses. Given that the review was notable for a very active typhoon season. Storm Hannover Re Group is the third-largest provider of reinsurance “Etau” caused a major loss for Hannover Re that we reserved protection in the Australian market, our results were initially in the amount of EUR 27.3 million. The other lines written here adversely affected by these events. As the financial year drew closed the period under review with mostly positive results. to a close, however, the overall result posted by the Australian permanent establishment proved to be encouragingly positive. Thanks to our historically broad positioning with the major Jap- This was facilitated by the high retentions carried by local ced- anese insurance groups in the Asia-Pacific region and world- ing companies, the selective underwriting policy practised by wide, the Hannover Re Group was also able to hold its premium our underwriters and a favourable run-off result. income stable despite sustained pressure on reinsurance conditions in the last April renewals. South Africa Our property and casualty reinsurance business in South Africa is generated by three companies. Hannover Reinsur- ance Africa Limited writes reinsurance in all lines – including specialty lines, which are written in close consultation with departments in Hannover. Compass Insurance writes direct business through so-called underwriting management agencies (UMAs). The third company, Lireas Holdings, holds interests in several of these UMAs. This enables us to comprehensively steer and control the business. Agency business forms the pillar of our activities in South Africa, although reinsurance business is also written on the open market in South Africa and other African countries.

44 Hannover Re | Annual Report 2015 This market continues to be characterised by its relatively low Agricultural risks insurance density; most vehicles on public roads, for example, The insurance of agricultural risks was one of Hannover Re’s are uninsured. Despite this, the insurance market showed only fastest growing segments in 2015. We further expanded marginal growth in the year under review, although the results our market position and rank among the preferred partners posted by insurers were significantly better than in the previous for agricultural covers. In addition, we have been taking an year. This can be attributed above all to a lower frequency of increasingly active role in product development. We entered large and catastrophe losses. into cooperative ventures with governments and international organisations in the year under review with a view to expand- Against this backdrop, both Compass Insurance and Hannover ing the protection of agricultural risks. Reinsurance Africa performed appreciably better in the 2015 financial year and delivered pleasing results. The premium Rates and conditions remained broadly stable on the primary volume contracted owing to negative exchange rate effects insurance side. Conditions in reinsurance business came under and expected shifts into large-volume, structured reinsurance pressure in the established markets due to new market players. arrangements. We were successful in our efforts to further diversify our port- Latin America folio mix in terms of both countries and lines of business; a Hannover Re is very well positioned in Latin America and a contributory factor here, for example, was an enlarged share Combined management report market leader in some countries. The most important markets of business involving insurance products for small farmers, for our company are Brazil, where we are present with a predominantly in emerging and developing countries. Growth representative office, as well as Mexico, Argentina, Colombia was also driven by the expansion of a long-standing customer and Ecuador. relationship in the United States.

Most Latin American markets have enjoyed very vigorous We are satisfied with the development of our agricultural risks growth in recent years and are still showing solid gains. Pri- business. The major loss situation was comparatively moderate mary insurance premiums are increasing by between 5% and in 2015. Hail events, droughts and floods had little or no impact 15% a year depending on the market. With natural catastrophe on our portfolio. To this extent, a healthy profit contribution risks highly exposed, the strong demand for reinsurance covers was generated on the back of the further improvement in our remains undiminished. In Latin America, too, the reinsurance diversification in this segment. market finds itself experiencing a soft phase. Premium income on the reinsurance side contracted in 2015 owing to the devalu- Retakaful business ation of some Latin American currencies and due to the higher We write retakaful business, i. e. reinsurance transacted in retentions carried by primary insurers. accordance with Islamic law, worldwide. Our focus is currently on the Middle East, North Africa and Southeast Asia. This busi- A survey of cedants conducted by the trade magazine “Intel- ness is written by our subsidiary in Bahrain. We also maintain ligent Insurer” confirmed our excellent position. Our clients a branch that is responsible for writing traditional reinsurance named us as a preferred partner in all categories. In Argentina, in the Middle East and North Africa. Our retakaful business has despite the restrictions placed on foreign reinsurers, we suc- been growing very vigorously for a number of years and we are ceeded in preserving our market leadership. We wrote our busi- satisfied overall with its development. ness increasingly selectively in order to generate our required margins. In Brazil we maintained our position in the face of Bearing in mind that takaful and retakaful markets have now ongoing market concentration on the primary insurance side. become fiercely competitive – in part due to the entry of new market players –, rates remain under sustained pressure. Han- Losses from natural disasters were again on the moderate nover Re has been active in retakaful business since 2006 and side for the (re)insurance industry in the year under review. the company is strongly positioned. We were particularly suc- The earthquake in Chile gave rise to net loss expenditure of cessful in growing our motor portfolio in the year under review; EUR 25.5 million for Hannover Re. Overall, we are satisfied with the largest single line is industrial fire business. the development of our business in Latin America.

Hannover Re | Annual Report 2015 45 Natural catastrophe business Insurance-Linked Securities (ILS) We write the bulk of our catastrophe business out of Bermuda, Our activities in relation to the transfer of reinsurance risks to which has established itself as a worldwide centre of compe- the capital market were highly successful in the financial year tence. In the interest of diversifying the portfolio our subsidi- just ended. By way of example, we were able to renew the pro- ary Hannover Re (Bermuda) Ltd. has also written some of the tection cover for Hannover Re known as the “K cession” – a specialty lines since 2013. modelled quota share cession consisting of non-proportional reinsurance treaties in the property, catastrophe, aviation and With major losses again lower than expected and hence the marine (including offshore) lines that has been placed inter alia associated good results posted by insurers and reinsurers, on the ILS market for more than 20 years now – at an increased and in view of the increasing capacities made available by level of roughly USD 400 million for 2015. so-called alternative capital markets, competition was intense. Reflecting this situation, rates in US property catastrophe busi- In addition, we enable investors to participate in insurance and ness fell further – albeit at a slowing pace. After the appreci- reinsurance risks. Our role can be that of initiator, arranger, able increases that we had booked in 2012 and 2013, rates structurer and / or fronter. The principal instruments are col- in Japan softened as anticipated. Only in isolated cases, most lateralised reinsurance and catastrophe bonds. Our business notably under loss-impacted programmes, were improvements partners on the investment side include specialised ILS funds, recorded. All in all, declining rates are the dominant feature of pension funds and hedge funds as well as primary insurers, cap- natural catastrophe business worldwide. tives and other portfolio managers seeking risks that promote diversification. The exposure volume that we transferred to the As in the previous years, losses were very much on the mod- capital market in 2015 in the form of catastrophe bonds was in erate side for both insurers and reinsurers and those losses excess of USD 1.5 billion, including more than USD 700 million that were incurred came in within the modelled claims expec- for the Texas Windstorm Insurance Association (TWIA), over tations. The largest single losses under our natural catastro- USD 300 million for the Massachusetts Property Insurance phe covers were the earthquake in Chile and the floods in the Underwriting Association (MPIUA) and another bond for Cal- United Kingdom. ifornia earthquake risks with a volume of USD 300 million. We also acted as co-manager in UnipolSai’s Azzurro transaction The gross premium volume for our global catastrophe business with a volume of more than EUR 200 million. developed favourably in the year under review, assisted in part by exchange rate movements: it rose from EUR 310.0 million to The currently available capital exceeds by far the opportu- EUR 374.9 million. The combined ratio deteriorated to 50.2% nities for new investments in catastrophe bonds. This has (39.3%). The operating profit (EBIT) came in at EUR 154.6 mil- prompted investors to look for other means of investing in the lion (EUR 185.6 million). reinsurance sector. So-called collateralised reinsurance again enjoyed particularly strong growth in the year under review and Structured reinsurance and Insurance-Linked Securities exceeds market-wide the volume of funds invested in catastro- Structured reinsurance phe bonds. Under collateralised reinsurance programmes the Hannover Re is one of the largest providers in the world for investor assumes reinsurance risks that are normally collateral- advanced solutions or structured reinsurance solutions, the ised in the amount of the limit of liability. Hannover Re further purpose of which – among other things – is to optimise the stepped up its cooperation with selected fund managers in the cost of capital for our ceding companies. In this area we offer area of collateralised reinsurance in the year under review and bespoke alternative reinsurance solutions that provide solvency generated attractive margins on this business. relief or protect our clients against basic losses in lower lay- ers. The 2015 financial year was notable for growing demand, The gross premium volume in structured reinsurance particularly with an eye to the implementation of Solvency II and from ILS activities climbed from EUR 917.7 mil- in Europe and other risk-based solvency regimes in various lion to EUR 1,306.8 million. The combined ratio stood at countries. 98.4% (94.1%). The operating profit (EBIT) amounted to EUR 57.4 million (EUR 102.6 million). In keeping with our objective we continued to expand our customer base and further improved the regional diversification of our portfolio in the year under review. The premium volume in structured reinsurance increased again – in part driven by unchanged brisk demand for quota share arrangements in the motor line.

46 Hannover Re | Annual Report 2015 Life & Health reinsurance

• Gross premium growth of 19.7% – currency-adjusted 9.5% – clearly above the target corridor of 5% to 7% • Targeted improvement in profitability achieved with higher Group net income • Strengthening of our international network through establishment of a branch in Toronto, Canada • Creation of a stand-alone online sales platform for direct selling of life insurance products in Malaysia

Life and health reinsurance accounted for 45% of Group gross customers, we have already identified various means of bring- premium in the financial year just ended. It has evolved into a ing about an optimal capital and solvency situation. Another core strategic business group of the Hannover Re Group and significant move in the reporting period just ended was the thus plays a key part in the company’s success. On the basis entry into the Canadian life reinsurance market with the estab- of our long-standing, partnership-based business relationships lishment of a branch in that country. Along with opening up with our customers, our expertise and our worldwide pres- new business opportunities, this will help to further diversify ence, we operate directly in the international arena – not only our portfolio. Asian as well as Central and Eastern European Combined management report identifying but also actively helping to shape trends and new markets are exhibiting stronger interest in automated under- markets. In so doing, we never lose our focus on profitability. writing systems and innovative life insurance concepts.

Total business Overall, the development of the year under review was thor- The performance of life and health reinsurance was at times vol- oughly satisfactory. We booked gross premium income for the atile in the individual quarters of the financial year just ended. financial year just ended of EUR 7,730.9 million (previous year: This was due to, among other things, differing developments EUR 6,458.7 million). This represents an increase of 19.7%. in the various markets. Adjusted for exchange rate fluctuations, growth came in at 9.5%. We thus comfortably beat the comparable growth target Preparations for the implementation of Solvency II at the for gross premium of 5% to 7%. The level of retained premium beginning of the 2016 financial year dominated the insurance also developed as planned and amounted to 84.2% (83.9%). industry in Europe. Insurance companies were heavily preoc- Net premium totalled EUR 6,492.4 million (EUR 5,411.4 mil- cupied with the future capital and reporting requirements. In lion). Adjusted for exchange rate effects, growth would have this connection, working together with our primary insurance reached 10.0%.

Key figures for Life & Health reinsurance M 20

2015 + / – 2014 2013 2012 1 2011 previous in EUR million year Gross written premium 7,730.9 +19.7% 6,458.7 6,145.4 6,057.9 5,270.1 Net premium earned 6,492.4 +20.0% 5,411.4 5,359.8 5,425.6 4,788.9 Investment income 709.2 +15.5% 614.2 611.5 685.1 512.6 Claims and claims expenses 5,459.0 +17.7% 4,636.2 4,305.7 4,023.5 3,328.6 Change in benefit reserve 101.1 28.6 146.5 529.4 619.7 Commissions 1,075.1 +13.6% 946.4 1,169.0 1,098.0 985.8 Own administrative expenses 197.3 +12.3% 175.7 156.7 144.1 130.6 Other income / expenses 35.9 +43.1% 25.1 (42.9) (36.7) (19.2) Operating result (EBIT) 405.1 +53.6% 263.8 150.5 279.0 217.6 Net income after tax 289.6 +41.3% 205.0 164.2 222.5 182.3 Earnings per share in EUR 2.40 +41.3% 1.70 1.36 1.84 1.51 Retention 84.2% 83.9% 87.7% 89.3% 91.0% EBIT margin 2 6.2% 4.9% 2.8% 5.1% 4.5%

1 Adjusted pursuant to IAS 8 2 Operating result (EBIT) / net premium earned

Hannover Re | Annual Report 2015 47 Life & Health reinsurance at a glance

Breakdown of gross premium by markets M 21 Value of New Business (VNB) growth 1 M 22 in EUR million in EUR million

581 80008,000 7,731 600600 228 543 237 294 70007,000 6,459 6,145 774 500500 6,058 176 448 188 242 60006,000 200 249 5,270 284 274 842 199 222 693 188 400400 617 589 50005,000 322 157 750 1,323 583 585 314 309 557

40004,000 420 584 750 942 300300 241 491 1,877 30003,000 1,550 1,457 1,439 200200 1,474 ≥ 180 20002,000 100 2,082 2,156 100 10001,000 2,041 1,966 1,663

00 00 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2015 2 North America United Kingdom Asia Value of New Business (VNB) Value of New Business – target

Australia / New Zealand Rest of Europe 1 Based on the MCEV Principles of the CFO Forum Central and Latin America Germany Africa 2 Increase in the cost of capital from 4.5% to 6.0% (in conformity with Solvency II)

Breakdown of gross written premium M 23 EBIT-margin per reporting category M 24 by reporting categories vs. target margins 2015 in EUR million in %

80008,000 7,731 ≥ 2 18.1 70007,000 6,459 1,416 6,058 6,145 ≥ 2

6,000 1,202 6000 873 4.5 5,270 813

50005,000 644 ≥ 6 3,562 3.6 4,000 2,834 4000 2,825 2,950 2,624 10 15 20

30003,000 0 0 5 5 10 15 20

EBIT margin financial solutions 2,000 884 885 1,482 2000 1,012 885 EBIT margin longevity 1 1,000 1000 1,554 EBIT margin mortality / morbidity 1,118 1,537 1,295 1,271 Target margin 00 2011 2012 2013 2014 2015 1 Including a longevity treaty that was previously classified Financial solutions Longevity Mortality Morbidity under financial solutions

48 Hannover Re | Annual Report 2015 Investment income in life and health reinsurance amounted US financial solutions business, in particular, again fared thor- to EUR 709.2 million (EUR 614.2 million). The investment oughly profitably in the financial year just ended and delivered income derives, on the one hand, from our assets under own a positive profit contribution. Along with solutions for capital management and, secondly, from securities deposited with relief and optimising the solvency situation of our customers in ceding companies. In the financial year just ended income of the life insurance market, we extended our business activities EUR 334.3 million (EUR 258.5 million) was generated from the in the year under review to the emergent longevity and health assets under own management, while income from securities reinsurance market and have already completed the first trans- deposited with ceding companies came in at EUR 374.9 million actions. The underlying profitability of the financial solutions (EUR 355.7 million). The modest increase in the investment business generated in the United States developed superbly. income should be viewed particularly favourably in light of the As a further factor, the investment income was positively influ- unchanged low level of interest rates and is a testament to a enced on a one-off basis by the cancellation of a financial solu- solid investment strategy. tions contract in an amount running into the mid-double-digit millions of US dollars. Australia similarly developed well in the The operating result (EBIT) in life and health reinsur- financial year just ended, especially in the area of new busi- ance reached a very pleasing level of EUR 405.1 million ness financing, and thereby laid the foundation for the future. (EUR 263.8 million). The increased result was boosted by the gratifying development of financial solutions business. Over- In China the new supervisory regime C-ROSS (China Risk Ori- Combined management report all, the very good underlying profitability was influenced on ented Solvency System), which was officially adopted on 1 Jan- the one hand by positive special effects, including for example uary 2016, left its mark on the (re)insurance market in the the early termination of a contract in the first quarter of 2015 financial year just ended. This was because companies were in an amount of EUR 39.0 million. Negative one-off effects already applying the regulations on a test basis in 2015, hence also played a part, however, as was the case at our branch in generating stronger demand for reinsurance concepts to fit the France. Against this backdrop, Group net income for life and new framework conditions. health reinsurance increased by 41.3% to EUR 289.6 million (EUR 205.0 million). In South Africa, too, new supervisory requirements for the (re) insurance industry are on the verge of implementation. Gen- In the following sections we discuss developments in life and erally speaking, financial solutions business in South Africa health reinsurance in greater detail on the basis of our report- and Asia developed positively overall with a pleasing share of ing categories. We split our business and the associated report- new business. ing into the categories of financial solutions and risk solutions. For the purposes of differentiation by biometric risks, the cate- Our activities in the area of financial solutions produced gross gory of risk solutions is further divided into longevity, mortality premium of EUR 1,271.3 million (EUR 1,295.2 million). This is and morbidity. This also corresponds to the breakdown used equivalent to 16.4% of the total gross premium income booked within our internal risk management system. in life and health reinsurance. The operating result (EBIT) amounted to EUR 203.2 million (EUR 74.6 million), a gratify- Financial solutions ing performance after the comparatively low EBIT reported in Our financial solutions reporting category encompasses rein- 2014. The EBIT margin stood at 18.1% (6.5%). surance solutions that focus on the management of our clients’ balance sheets and thereby support them in – among other Longevity things – financing new business and optimising their capital The longevity reporting category encompasses our entire annu- or solvency structure. A crucial criterion for allocation to this ity and pension reinsurance business, insofar as the material category is that there is less emphasis on biometric risks with risk here is the longevity risk. The policies in our portfolio are this form of reinsurance, even though they are always present. for the most part already in the pay-out phase.

Financial solutions business has been a central pillar of our activities for many years. We are equipped with long-standing expertise and current surveys rank us as the leading provider in a number of markets, including for example the United States. A special hallmark of our business philosophy is that we do not fall back on standardised reinsurance solutions. We offer our clients financing solutions and customised concepts designed to provide relief for capital and reserves that are individually tailored to their needs. This approach has stood the test of time and resulted in another exceptionally pleasing profit contribution in the year under review.

Hannover Re | Annual Report 2015 49 Our portfolio consists to a large extent of enhanced annuities. double-digit million euros for this business. The effects of this These guarantee individuals with a reduced life expectancy restructuring were felt pro rata in the year under review. More- a higher regular income for the remainder of their shorter over, working in cooperation with a primary insurance partner, lifespan. The United Kingdom continued to be our largest lon- we launched a holistic lifestyle concept in the US market that gevity market by premium volume in the year under review. combines traditional life insurance policies with benefits and Although the reform of the UK Pensions Act in April 2015 had rewards in the area of health and wellness. a particularly adverse effect on enhanced annuities business, the implications for our premium volume have proven to be Looking at the year under review as a whole, our mortality-ex- considerably less marked than previously anticipated. posed business in Europe experienced volatility. In Continental Europe stronger demand could be discerned for unit-linked and The longevity sector throughout the rest of the European mar- risk-oriented products. The difficult situation on capital market saw unusually brisk activity prompted by the impending kets, especially when it comes to the protracted low level of implementation of Solvency II. This opened up a broad array of interest rates, is driving this trend. In Central European mar- attractive business opportunities for our company, and in vol- kets and some parts of Northern Europe we similarly observed ume terms the financial year just ended proved to be the most increased interest in risk-oriented insurance products as well as successful in Hannover Re’s history. This positive development stronger demand for automated underwriting systems and alter- was also crucially reinforced by stronger worldwide demand native sales channels in general. This demand was also evident for longevity solutions. The global demographic trend played in Asia. In Russia we were able to successfully roll out our pro- a part here, generating further demand around the world for prietary automated underwriting system for the first time on a the transfer of longevity portfolios. joint basis with one of our customers. Not only that, in Malaysia we established a sales company for the exclusive online selling The gross premium for worldwide longevity business totalled of insurance policies. EUR 1,482.1 million (EUR 1,012.0 million) in the year under review. The operating result (EBIT) amounted to EUR 54.0 mil- We were able to further increase the gross premium in lion (EUR 23.7 million), while the EBIT margin stood at 4.5% the mortality reporting category to EUR 3,561.6 million (2.9%). (EUR 2,949.5 million) in the year under review. At 46.1%, mortality business therefore once again contributed the lion’s share Mortality and morbidity of our total gross premium income from life and health reinsur- In the following section we report on our mortality and morbid- ance (EUR 7.7 billion). ity business. In the international (re)insurance markets these two risk types frequently occur together in business relation- Morbidity ships and sometimes they are even covered under the same Morbidity business encompasses all business relating to the reinsurance treaties. It therefore makes sense to consider the risk of deterioration in a person’s state of health due to dis- results of both reporting categories on a consolidated basis and ease, injury or infirmity. The morbidity reporting category is merely to give a separate account of the business development. notable for extensive product diversity, ranging from strict (any occupation) disability and occupational disability to numerous Mortality varieties of long-term care insurance. We are active in this area Mortality-exposed business traditionally constitutes the core as a robust business partner, supporting our customers with business of life and health reinsurance. The mortality reporting our know-how and through risk transfer. category accounts for the largest share of our total life and health reinsurance portfolio. The risk that we assume as a reinsurer is The development of group and health business in the Middle that the actually observed mortality may diverge negatively from East gave grounds for satisfaction in the year under review. the expected mortality. In the United Kingdom, too, our business fared well despite an extremely competitive environment. In Asian markets we With our subsidiary Hannover Life Reassurance Company of noted stronger demand for critical illness covers. America we have grown into an established and sought-after business partner in our important US mortality market. Business The Australian market recovered appreciably in the financial there fell short of our expectations in the year under review. This year just ended, enabling us to slightly enlarge our portfolio can be attributed principally to the one-time payout of a very in this area. The run-off of Australian disability business was lucrative life insurance policy. In view of the risk experiences in line with our expectations. Results in the US market were observed in a partial portfolio, we stepped up our portfolio main- slightly poorer than we had anticipated owing to increased tenance activities with a view to further optimising the develop- losses. The reform of the health sector there is nevertheless ment of business going forward. In addition, by restructuring injecting fresh impetus into the market. We expect this to our collateral instruments in September of 2015 we were able have positive implications for the development of business to achieve a future annual saving – starting in 2016 – in the low going forward.

50 Hannover Re | Annual Report 2015 From a global perspective, however, we observed lively demand Our goal in life and health reinsurance is to offer our custom- in the financial year just ended – above all with respect to ers a broad and individually tailored range of solutions and products for long-term care insurance. Particularly in mature – in addition to pure risk assumption – to successfully support insurance markets with progressively ageing demographics, them in the service sector. In the field of medical underwrit- demand for protection in retirement and in case of illness is ing, we strive to highlight – inter alia through our “ReCent” growing. Consequently, we were able to boost our premium for newsletter – current and relevant topics in health and medi- worldwide morbidity business by 17.8% to EUR 1,415.9 mil- cine. When it comes to our electronic underwriting manual lion (EUR 1,202.1 million). “Ascent” – which provides our customers with integrated support for individual risk assessment –, we similarly focus on con- Taken together, we generated an operating result (EBIT) of tinuous updating and enhancement of the contents in order to EUR 147.8 million (EUR 165.5 million) for the reporting cat- adequately reflect the latest market developments and trends egories of mortality and morbidity in the financial year just at all times. Furthermore, thanks to our international network ended. This is equivalent to an EBIT margin of 3.6% (4.8%). we are able to quickly and directly transfer novel and innovative reinsurance solutions to other markets.

Investments Combined management report • Pleasing return on investment (excluding effects from ModCo derivatives and inflation swaps) better than our forecast at 3.5% • Ordinary income higher despite low interest rates • High-quality investment portfolio even more diversified through equity exposure

Bearing in mind the persistently low level of interest rates, We recognise a derivative for the credit risk associated with ordinary investment income excluding interest on funds special life reinsurance treaties (ModCo) under which secu- withheld and contract deposits delivered a highly gratifying rities deposits are held by cedants for our account; the per- performance to reach EUR 1,253.4 million (previous year: formance of this derivative in the year under review gave EUR 1,068.4 million). This can be attributed to sharply higher rise to negative fair value changes recognised in income of income from fixed-income investments, real estate and private EUR 26.1 million (loss of EUR 6.8 million). The inflation swaps equity, the measurement of which was additionally supported taken out in 2010 to hedge part of the inflation risks associated by effects associated with the appreciation of various curren- with the loss reserves in our technical account no longer gave cies against the euro. Our exposure to high-yield investment rise to any fair value changes recognised in income because funds as well as special income from life reinsurance business these contracts matured or were terminated in the course of also played a very pleasing part here. Interest on funds with- the second quarter. In future, we shall ensure this protection held and contract deposits improved slightly on the previous through the inflation-linked bonds already contained in our year to EUR 395.0 million (EUR 376.1 million). Net realised portfolio. Altogether, the positive changes in the fair values of gains on disposals came in below the previous year’s figure our financial assets recognised at fair value through profit or at EUR 135.8 million (EUR 182.5 million) despite the liquidity loss amounted to EUR 0.9 million (loss of EUR 33.3 million). made available for dividend payments and preparations made for the changeover in our Irish subsidiary’s functional currency to USD as well as regrouping moves to expand the asset classes of fixed income enhancements and emerging markets and the rebuilding of an equity portfolio.

Hannover Re | Annual Report 2015 51 Investment income M 25

2015 + / – 2014 2013 2012 2011 previous in EUR million year Ordinary investment income 1 1,253.4 +17.3% 1,068.4 1,041.3 1,088.4 966.2 Result from participations in associated companies 19.2 1.0 12.5 10.4 3.1 Realised gains / losses 135.8 -25.5% 182.5 144.2 227.5 179.6 Appreciation 0.6 0.1 0.3 2.7 36.8 Depreciation, amortisation, impairments 2 38.7 +39.8% 27.7 19.4 21.7 31.0 Change in fair value of financial instruments 3 0.9 (33.3) (27.1) 89.3 (38.8) Investment expenses 101.2 +6.2% 95.3 97.3 96.4 70.3 Net investment income from assets under own management 1,270.1 +15.9% 1,095.8 1,054.5 1,300.2 1,045.5 Net investment income from funds withheld and contract deposits 395.0 +5.0% 376.1 357.3 355.5 338.5 Total investment income 1,665.1 +13.1% 1,471.8 1,411.8 1,655.7 1,384.0

1 Excluding income and expenses on funds withheld and contract deposits 2 Including depreciation / impairments on real estate 3 Portfolio at fair value through profit or loss and trading

Impairments and depreciation totalling just EUR 38.7 mil- Investment income M 26 lion (EUR 27.7 million) were taken. Scheduled depreciation in EUR million on directly held real estate amounted to EUR 23.7 million (EUR 18.5 million), a reflection of the further increase in our 2,0002000 involvement in this sector. The vast bulk of impairments – totalling EUR 5.9 million – were attributable to alternative invest- 1,656 1,665 ments (EUR 5.8 million). In addition, impairments were 1,472 1,500 1,412 recognised on real estate in an amount of EUR 4.5 million 1500 1,384 356 395

(EUR 1.4 million) as well as on fixed-income securities in an 376 357 amount of EUR 2.8 million (EUR 2.0 million) and on equities in 339 an amount of EUR 1.9 million (EUR 0.0 million). These write- 1,0001000 downs contrasted with write-ups of altogether EUR 0.6 million

(EUR 0.1 million). 1,300 1,270

1,096 500500 1,046 1,054 Our investment income (including interest and expenses on funds withheld and contract deposits) consequently came in comfortably above the previous year’s level at EUR 1,665.1 million (EUR 1,471.8 million). This can be attributed princi- 0 0 2011 2012 2013 2014 2015 pally to the aforementioned sharp rise in ordinary income. Of this amount, income from assets under own management Investment income from assets under own management accounted for EUR 1,270.1 million (EUR 1,095.8 million). This Income and expenses on funds withheld and contract deposits produces an average return (excluding effects from ModCo derivatives and inflation swaps) of 3.5%; it is pleasing to note that this figure is higher than our forecast of 3.0%, a reflection not only of stronger income from private equity, real estate and fixed income enhancements but also of the effects associated with the appreciation of various currencies against the euro.

52 Hannover Re | Annual Report 2015 Financial position and net assets • High-quality investment portfolio diversified even further through equity holding • Asset allocation adjusted to safeguard the return • Shareholders’ equity sharply higher thanks to excellent Group net income despite lower valuation reserves

Investment policy

Hannover Re’s investment policy continues to be guided by the By adjusting the maturity pattern of our fixed-income securities following core principles: to the expected payment patterns of our liabilities we reduce the economic exposure to the interest rate risk. In the current • generation of stable and risk-commensurate returns while reporting period we kept the modified duration of our fixed- at the same time maintaining the high quality standard income portfolio broadly neutral, as a result of which it stood of the portfolio; at 4.4 (previous year: 4.6) as at 31 December 2015. Combined management report • ensuring the liquidity and solvency of Hannover Re at all times; Furthermore, through active and regular management of the • high diversification of risks; currency spread in our fixed-income portfolio we bring about • limitation of currency exposures and maturity risks extensive matching of currencies on the assets and liabilities through matching currencies and maturities. sides of the balance sheet, as a consequence of which fluctuations in exchange rates have only a limited effect on our result. With these goals in mind we engage in active risk management At year-end 2015 we held 30.8% (36.9%) of our investments based on balanced risk / return analyses. To this end we make in euro, 46.7% (41.4%) in US dollars, 8.3% (8.5%) in pound allowance for insights gained from dynamic financial analy- sterling and 5.1% (5.2%) in Australian dollars. sis and have implemented detailed investment guidelines on a centralised basis. We are thus able to take into account the prevailing state of the market and the basis is established for the current structuring of the liabilities side, which must be factored into operational management of the portfolio. These measures are intended to safeguard the generation of an appropriate level of return. In so doing, we pay strict attention to compliance with our clearly defined risk appetite, which is reflected in the risk capital allocated to the investments and constitutes the foundation for the asset allocation of the entire Hannover Re Group. In addition, our ability to meet our payment obligations at all times is thereby ensured. Within the scope of our asset / liability management (ALM) the allocation of investments by currencies and maturities is determined by the technical liabilities. With this in mind the modified duration of our bond portfolio is geared largely to the technical liabilities.

Investment portfolio M 27

in EUR million 2015 2014 2013 2012 2011 Funds withheld 13,990 15,919 14,343 14,751 13,342 Investments under own management 39,347 36,228 31,875 31,874 28,341 Total 53,337 52,147 46,219 46,625 41,683

Hannover Re | Annual Report 2015 53 Breakdown of investments under own management M 28 to expand the asset classes of fixed income enhancements and in % emerging markets while at the same time enlarging our holding of government bonds. On the other hand, the proportion of

100 mid-rated covered bonds and corporate bonds was reduced. In 3 4 4 100 5 5 2 this way we can achieve increased liquidity of the portfolio with 2 2 2 2 1 2 2 4 4 4 stable return expectations, while extensively maintaining the 90 2 2 2 3 overall risk level of our fixed-income portfolio unchanged. We

17 also moved to further slightly increase the share attributable to 16 14 10 15 80 real estate as part of the strategic expansion of this asset cate- 80 gory. In all other asset classes we made only minimal changes in the context of regular portfolio maintenance. 70 The portfolio of fixed-income securities excluding short-term 34 assets rose to EUR 33.6 billion (EUR 32.0 billion). Hidden 60 32 30 60 34 35 reserves for available-for-sale fixed-income securities, which are allocable to shareholders’ equity, totalled EUR 635.6 mil- 50 lion (EUR 1,246.4 million). This reflects the yield increases observed in the course of the reporting period, especially in the area of US Treasuries, and above all higher risk premiums on 40 40 corporate bonds and semi-government bonds. As to the quality 17 of the bonds – measured in terms of rating categories –, the

23 23 30 19 proportion of securities rated “A” or better remained on a vir- 20 tually unchanged high level as at year-end at 79.8% (82.9%).

20 20 Rating of fixed-income securities M 29

26 10 21 3.8% < BBB 19 19 19 16.5% BBB 43.8% AAA

0 0 2011 2012 2013 2014 2015

Government bonds Semi-government bonds Corporate bonds 18.7% A Covered Bonds, ABS Private Equity Real estate

Other Short-term investments and cash 17.2% AA

Investments Holdings of alternative investment funds increased appreciably. As at 31 December 2015 an amount of EUR 781.5 million Our portfolio of assets under own management grew substan- (EUR 684.9 million) was invested in private equity funds; a tially in the course of 2015 to EUR 39.3 billion (EUR 36.2 billion). further EUR 678.8 million (EUR 551.5 million) was attributable This was due in large measure to exchange rate effects – pri- predominantly to investments in high-yield bonds and loans. marily associated with the US dollar – and in particular to our In addition, altogether EUR 371.3 million (EUR 373.7 mil- gratifyingly positive operating cash flow. The only inhibiting lion) was invested in structured real estate investments. The factors in this growth were the decline in valuation reserves in uncalled capital with respect to these asset classes totalled connection with the observed yield increases on US Treasuries EUR 837.1 million (EUR 716.3 million). and higher credit spreads. We again slightly increased our real estate allocation in the Along with the rebuilding of an equity portfolio, we adjusted the course of the year. Two properties were acquired in the United allocation of our investments to the individual classes of secu- States for this purpose; further projects are under review, and rities in other asset categories as well in response to the chal- the real estate allocation will therefore keep rising steadily as lenging interest rate environment. For example, we continued planned. Despite selective sales in the course of the reporting

54 Hannover Re | Annual Report 2015 period, it rose to 4.4% (3.9%). By moving back into listed Management of policyholders’ surplus equities – accounting for 1% of the asset portfolio – we further improved the diversification of our investment portfolio. A key strategic objective of Hannover Re is long-term capital preservation. Just as in previous years, we issued hybrid capital At the end of the year under review we held a total amount as an equity substitute in order to keep the cost of capital on a of EUR 1.9 billion (EUR 1.3 billion) in short-term investments low level. The policyholders’ surplus is an important manage and cash. Funds withheld amounted to EUR 14.0 billion ment ratio in the context of Hannover Re’s comprehensive cap- (EUR 15.9 billion). ital management. The total policyholders’ surplus is defined as follows:

Analysis of the capital structure • shareholders’ equity excluding non-controlling interests, composed of the common shares, additional paid-in cap- The capital structure and the composition of the liabilities of ital, other comprehensive income and retained earnings, Hannover Re are shaped by our activity as a reinsurer. By far • non-controlling interests and the largest share is attributable to technical provisions and • hybrid capital used as an equity substitute, which takes liabilities. Further elements are equity and equity substitutes, the form of subordinated bonds. which help to substantially strengthen our financial base and Combined management report optimise our cost of capital. The following chart shows our The policyholders’ surplus totalled EUR 10,267.3 million capital structure as at 31 December 2015, broken down into (EUR 10,239.5 million) as at the balance sheet date. The rise in percentages of the balance sheet total. retained earnings and in the foreign currency gains and losses recognised in equity were opposed in the year under review by Capital structure as at 31 December 2015 M 30 the redemption of subordinated debt with a nominal volume of EUR 500 million and a decline in the unrealised gains and 4.8% Other liabilities 2.8% Loans and losses recognised in equity. Overall, therefore, the policyholders’ subordinated capital surplus remained almost unchanged with an increase of 0.3%.

13.9% Equity Hannover Re uses “Intrinsic Value Creation” (IVC) as its central value-based management tool. As part of this methodology, we apply the principles of economic allocation of equity and efficient use of debt as an equity substitute in order to achieve the lowest possible weighted cost of capital. This concept as well

78.5% Technical as the objectives and principles in accordance with which we provisions and liabilities conduct our enterprise management and capital management are described in greater detail in our remarks on value-based management on page 23 et seq. of this report. The technical provisions and liabilities shown above, which include funds withheld / contract deposits and reinsurance payable, make up 78.5% (77.6%) of the balance sheet total and are more than covered by our investments, (assets-side) funds withheld / contract deposits, accounts receivable and reinsurance recoverables.

The equity including non-controlling interests at 13.9% (13.7%) of the balance sheet total as well as the loans and – especially – subordinated capital at altogether 2.8% (3.8%) of the balance sheet total represent our most important sources of funds.

We ensure that our business is sufficiently capitalised at all times through continuous monitoring and by taking appropriate steering actions as necessary. For further information please see the following section “Management of policyholders’ surplus”.

Hannover Re | Annual Report 2015 55 Development of policyholders’ surplus M 31 The book value per share increased accordingly by 6.9% to in EUR million EUR 66.90. The changes in shareholders’ equity were shaped chiefly by the following developments: 12,00012000 Net unrealised gains on investments stood at EUR 712.0 mil- 10,239 10,267 lion, a drop of EUR 457.3 million compared to the beginning 10,000 10000 995 996 8,947 8,768 of the year under review. This decrease was mainly due to 494 991 709 higher risk premiums for corporate bonds held in our portfolio 8,000 1,743 8000 7,339 1,744 702 as well as to the rise in the short- and medium-term US dollar 490 1,246 493 interest rate level. 682 642 6,0006000 486 636 The foreign currency gains and losses climbed significantly by

4,0004000 7,551 8,068 EUR 318.7 million from EUR 190.5 million to EUR 509.2 mil- 6,032 5,888 lion as a consequence of exchange rate movements of foreign 4,971 currencies against the euro in the financial year. The rise in the 2,0002000 reserve for currency translation adjustment resulted principally from the marked depreciation of the euro against the US dollar. 0 0 2011 2012 2013 2014 2015 Non-controlling interests in shareholders’ equity increased Shareholders’ equity Non-controlling interests marginally by EUR 6.9 million to EUR 709.1 million as Hybrid capital, no maturity Hybrid capital, limited maturity at 31 December 2015. The bulk of this – in an amount of EUR 667.1 million – is attributable to the non-controlling interests in E+S Rückversicherung AG. In its capital management Hannover Re is guided by the requirements and expectations of the rating agencies that The Group net income for 2015 attributable to the sharehold- assess the Group with an eye to its targeted rating. Further- ers of the Hannover Re Group climbed to EUR 1,150.7 million more, while making appropriate allowance for business policy (EUR 985.6 million). The non-controlling interest in the profit considerations and factors that influence market presence, the generated in the year under review totalled EUR 64.0 million allocation of capital to the Group’s operational companies is (EUR 79.5 million). based upon the economic risk content of the business group in question. The Group companies are also subject to national Development of Group shareholders’ equity M 32 capital and solvency requirements. All Group companies met in EUR million the applicable local minimum capital requirements in the year under review. Adherence to these capital requirements is con- 1000010,000 tinuously monitored by the responsible organisational units 8,777 on the basis of the latest actual figures as well as the corre- 8,253 709 sponding planned and forecast figures. If, despite the capi- 80008,000 702 1,151 tal allocation mechanisms described above, a scenario occurs 6,714 6,530 986 in which there is a danger of minimum capital requirements 5,607 682 642 being undershot, suitable options are immediately discussed 60006,000 850 895 636 and measures set in motion to counteract such an eventuality. 606 4,417 4,889 From the Group perspective we manage Hannover Re’s sol- 40004,000 vency using our internal capital model (cf. “Opportunity and 3,400 3,886 risk report”, page 74 et seq.). 3,073 20002,000 1,303 1,183 938 446 262

Group shareholders’ equity 845 845 845 845 845 00 2011 2012 2013 2014 2015 In view of the very positive result, the development of the shareholders’ equity of the Hannover Re Group was pleasing. Common shares and additional paid-in capital Compared to the position as at 31 December 2014, it surged Cumulative other comprehensive income by EUR 524.5 million – or 6.4% – in the year under review Retained earnings excluding Group net income (loss) to EUR 8,777.5 million. After adjustment for non-controlling Group net income (loss) Non-controlling interests interests, it rose by EUR 517.6 million to EUR 8,068.3 million.

56 Hannover Re | Annual Report 2015 Financing and Group debt Our subordinated bonds supplement our equity with the aim of reducing the cost of capital and also help to ensure liquidity at In addition to the financing effect of the changes in share- all times. In the year under review we cancelled and repaid at the holders’ equity described above, debt financing on the capital first scheduled call date the subordinated debt of EUR 500.0 mil- market is a significant component of Hannover Re’s financing. lion issued in 2005 by Hannover Finance (Luxembourg) S.A. It was essentially composed of subordinated bonds issued to As at the balance sheet date altogether three subordinated ensure lasting protection of our capital base – in part also bonds had been placed on the European capital market through in observance of rating requirements. The total volume of Hannover Rück SE and Hannover Finance (Luxembourg) S.A. debt and subordinated capital stood at EUR 1,798.3 million (EUR 2,270.3 million) as at the balance sheet date. The following table presents an overview of the amortised cost of the issued bonds.

Amortised cost of our subordinated bonds M 33

in EUR million Issue date Coupon in % 2015 2014 Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2005 / undated 1.6.2005 5.00 – 497.7

Hannover Finance (Luxembourg) S.A., subordinated debt, Combined management report EUR 500 million; 2010 / 2040 14.9.2010 5.75 498.7 498.4 Hannover Finance (Luxembourg) S.A., subordinated debt, EUR 500 million; 2012 / 2043 20.11.2012 5.00 497.2 496.9 Hannover Rück SE, subordinated debt, EUR 500 million; 2014 / undated 15.9.2014 3.375 494.0 493.5 Total 1,489.9 1,986.5

Several Group companies have also taken up long-term debt – Analysis of the consolidated cash flow principally in the form of mortgage loans – amounting to statement EUR 308.5 million (EUR 283.9 million). Liquidity For further explanatory information please see our remarks in We generate liquidity primarily from our operational reinsur- the notes to this report, Section 6.12 “Debt and subordinated ance business, investments and financing measures. Regular capital”, page 208 et seq., and Section 6.13 “Shareholders’ liquidity planning and a liquid investment structure ensure equity and treasury shares”, page 212. that Hannover Re is able to make the necessary payments at all times. Hannover Re’s cash flow is shown in the consolidated Various financial institutions have provided us with letters cash flow statement on page 142 et seq. of credit for the collateralisation of technical liabilities. Both bilateral agreements and an unsecured syndicated guarantee Hannover Re does not conduct any automated internal cash facility existed as at the balance sheet date with a number pooling within the Group. Liquidity surpluses are managed and of financial institutions for this purpose. The guarantee facil- created by the Group companies. Various loan relationships ity was terminated in January 2016 and partially refinanced exist within the Hannover Re Group for the optimal structuring through bilateral credit facilities. We report in detail on existing and flexible management of the short- or long-term allocation contingent liabilities in the notes, Section 6.12 “Debt and sub- of liquidity and capital. ordinated capital” in our remarks on other financial facilities, page 211, and Section 8.7 “Contingent liabilities and commitments”, page 232 et seq.

Hannover Re | Annual Report 2015 57 Consolidated cash flow statement M 34 Cash flow from investing activities After allowance for dividend payments and financing measures, in EUR million 2015 2014 the substantially higher cash flow from operating activities was Cash flow from operating activities 3,104.9 1,930.9 for the most part invested in an amount of EUR 2,048.1 mil- Cash flow from investing activities (2,048.1) (1,195.3) lion (EUR 1,195.3 million) while preserving the existing asset Cash flow from financing activities (1,054.8) (647.6) structure. Exchange rate differences on cash 17.7 46.0 Change in cash and Regarding the development of the investment portfolio please cash equivalents 19.7 134.0 see also our remarks at the beginning of this section. Cash and cash equivalents at the beginning of the period 772.9 642.9 Cash flow from financing activities Change in cash and cash The cash flow from financing activities decreased from equivalents according to -EUR 647.6 million to -EUR 1,054.8 million in the year under cash flow statement 19.7 134.0 review. This was mainly due to redemption of the EUR 500.0 mil- Changes in the consolidated group – (4.0) lion subordinated debt issued by Hannover Finanz (Luxemburg) Cash and cash equivalents S.A. at the first scheduled call date as well as the higher divi- at the end of the period 792.6 772.9 dend payments of EUR 557.4 million (EUR 403.4 million).

Cash flow from operating activities Overall, allowing for the changes in the consolidated group, The cash flow from operating activities, which also includes the cash and cash equivalents therefore increased year-on-year inflows from interest received and dividend receipts, amounted by EUR 19.7 million to EUR 792.6 million. to EUR 3,104.9 million in the year under review as opposed to EUR 1,930.9 million in the previous year. The sharp increase of For further information on our liquidity management please EUR 1,174.0 million in the net inflow year-on-year was essen- see page 95 of the risk report. tially attributable to the generally higher premium volumes and, in particular, to certain financial solutions contracts in the area of life and health reinsurance under which the premiums Financial strength ratings had already been received by the balance sheet date but the corresponding retrocession premiums were not scheduled to A.M. Best and Standard & Poor’s, the rating agencies of par- be paid until the beginning of 2016. ticular relevance to the insurance industry, assess the financial strength of Hannover Re on the basis of an interactive rating Cash flow from operating activities M 35 process and have awarded it very good ratings. The rating in EUR million agencies highlight in particular the strength of the Hannover Re Group’s competitive position, its capitalisation and its risk 35003,500 management. 3,105 30003,000 Financial strength ratings of the Hannover Re Group M 36 2,637 2,523 Standard & A.M. Best 2,500 2500 2,225 Poor’s 1,931 Rating AA- A+ 2,000 2000 (Very Strong) (Superior) Outlook stable stable 15001,500

10001,000

500500

0 0 2011 2012 2013 2014 2015

58 Hannover Re | Annual Report 2015 Financial strength ratings of subsidiaries M 37 Talanx AG, Hannover, directly holds 50.2% (rounded) of the company’s voting rights. HDI-Haftpflichtverband der Deutschen Standard & A.M. Best Industrie Versicherungsverein auf Gegenseitigkeit, Hannover, Poor’s which holds a stake of 79.0% in Talanx AG, therefore indirectly E+S Rückversicherung AG AA- A+ holds 39.7% (rounded) of the voting rights in the company. Hannover Life Reassurance Africa Ltd. BBB+ – There are no shares with special rights granting their holders Hannover Life Reassurance powers of control, nor is there any specially structured voting Bermuda Ltd. AA- A+ control for employees who have capital participations and do Hannover Life Reassurance Company of America AA- A+ not directly exercise their rights of control. Hannover Life Re of Australasia Ltd. AA- – The appointment and recall of members of the Executive Board Hannover Reinsurance are determined by §§ 84 et seq. Stock Corporation Act. Amend- Africa Ltd. BBB+ – ment of the Articles of Association is governed by §§ 179 et seq. Hannover Re (Ireland) Ltd. AA- A+ Stock Corporation Act in conjunction with § 18 Para. 2 of the Hannover Re (Bermuda) Ltd. AA- A+ Articles of Association of Hannover Rück SE.

Hannover ReTakaful B.S.C. (c) A+ – Combined management report The powers of the Executive Board with respect to the issue International Insurance Company of Hannover SE AA- A+ and repurchase of shares are defined in the Articles of Asso- ciation of Hannover Rück SE as well as in §§ 71 et seq. Stock Corporation Act. In this connection the Annual General Meet- Issue ratings of issued debt ing authorised the Executive Board on 6 May 2015 pursuant As part of the process of rating Hannover Re the rating agen- to § 71 Para. 1 Number 8 Stock Corporation Act to acquire cies also assess the debt issued by the Hannover Re Group. treasury shares on certain conditions for a period of five years, ending on 5 May 2020. Issue ratings of issued debt M 38 The following paragraphs explain major agreements con- Standard & A.M. Best Poor’s cluded by the company that are subject to reservation in the event of a change of control, inter alia following a takeover Hannover Rück SE, subordinated debt, EUR 500 million; bid, and describe the resulting effects. Some letter of credit 2014 / undated A a lines extended to Hannover Rück SE contain standard market Hannover Finance (Luxembourg) change-of-control clauses that entitle the banks to early termi- S.A., subordinated debt, nation of a credit facility if Talanx AG loses its majority interest EUR 500 million; 2012 / 2043 A a+ or drops below the threshold of a 25% participation or if a third Hannover Finance (Luxembourg) party acquires the majority interest in Hannover Rück SE. For S.A., subordinated debt, EUR 500 million; 2010 / 2040 A a+ details of the letter of credit lines please see our explanatory remarks on other financial facilities in the notes, Section 6.12 “Debt and subordinated capital”, page 211.

Information pursuant to § 315 Para. 4 In addition, retrocession covers in property & casualty and German Commercial Code (HGB) life & health business contain standard market change-of-control clauses which in each case grant the other contracting The common shares (share capital) of Hannover Rück SE amount party a right of termination if a significant change occurs in to EUR 120,597,134.00. They are divided into 120,597,134 reg- the ownership structure and participation ratios of the affected istered no-par shares. contracting party.

The Executive Board of the company is not aware of any restric- The company has not concluded any compensation agreements tions relating to voting rights or the transfer of shares, includ- with the members of the Executive Board or with employees ing cases where these may arise out of agreements between in the event of a takeover bid being made. shareholders.

The following companies hold direct or indirect capital participations that exceed 10% of the voting rights:

Hannover Re | Annual Report 2015 59 submitted to the operator of the electronic Federal Gazette Information on and can be accessed via the webpage of the Companies Reg- Hannover Rück SE ister. This annual financial statement may be requested from Hannover Rück SE, Karl-Wiechert-Allee 50, 30625 Hannover, (condensed version in accordance with the Commercial Code Germany. (HGB)) Hannover Rück SE transacts reinsurance business in the busi- Since the 2013 financial year Hannover Re has availed itself ness groups of Property & Casualty and Life & Health reinsur- of the option to present a combined Group and company man- ance. Through its global presence and activities in all lines of agement report pursuant to § 315 Para. 3 of the Commercial reinsurance the company achieves optimal risk diversification. Code (HGB) in conjunction with § 298 Para. 3 of the Commer- cial Code (HGB). Supplementary to the reporting on the Han- Since 1 January 1997 Hannover Rück SE has written active nover Re Group, we discuss below the development of Hannover reinsurance for the Group – with few exceptions – solely in Rück SE. foreign markets. Responsibility within the Hannover Re Group for German business rests with the subsidiary E+S Rückver- The annual financial statement of Hannover Rück SE is drawn sicherung AG. up in accordance with German accounting principles (HGB). The consolidated financial statement, on the other hand, con- forms to International Financial Reporting Standards (IFRS). Results of operations This gives rise to various divergences in accounting policies affecting, above all, intangible assets, investments, technical The 2015 financial year passed off highly satisfactorily for Han- assets and liabilities, financial instruments and deferred taxes. nover Rück SE. The gross premium of Hannover Rück SE in total business increased by 30.1% to EUR 14.1 billion (pre- The annual financial statement of Hannover Rück SE – from vious year: EUR 10.9 billion). The level of retained premium which the balance sheet and profit and loss account in par- contracted from 79.3% to 73.0%. Net premium earned grew ticular are reproduced here in condensed form – has been by 20.0% to EUR 10.2 billion (EUR 8.5 billion).

Condensed profit and loss account of Hannover Rück SE M 39

in EUR thousand 2015 2014 Earned premiums, net of retrocession 10,178,602 8,481,296 Allocated investment return transferred from the non-technical account, net of retrocession 328,840 442,194 Other technical income, net of retrocession 15 23 Claims incurred, net of retrocession 7,222,016 6,801,306 Changes in other technical provisions, net of retrocession (1,020,247) 166,116 Bonuses and rebates, net of retrocession (12) 48 Operating expenses, net of retrocession 2,105,799 2,301,759 Other technical charges, net of retrocession 1,056 1,533 Subtotal 158,351 (15,017) Change in the equalisation reserve and similar provisions (136,129) (277,646) Net technical result 22,222 (292,663) Investment income 1,862,593 1,739,563 Investment charges 166,675 158,722 Allocated investment return transferred to the technical account (532,949) (567,810) Other income 160,761 161,566 Other charges 281,979 284,151 Profit or loss on ordinary activities before tax 1,063,973 597,783 Taxes on profit and income and other taxes 158,172 176,546 Profit for the financial year 905,801 421,237 Profit brought forward from previous year 2,462 94,208 Allocations to other retained earnings 250,263 445 Disposable profit 658,000 515,000

60 Hannover Re | Annual Report 2015 The underwriting result for total business (before changes in Development of the individual lines of the equalisation reserve) improved in the year under review business from -EUR 15.0 million to EUR 158.4 million. An amount of EUR 136.1 million (EUR 277.6 million) was allocated to the The following section describes the development of the various equalisation reserve and similar provisions. lines of business. We would like to point out that with effect from the beginning of the 2014 financial year the exchange Major loss expenditure in the year under review was higher of business under joint underwriting arrangements between than in 2014. Although the hurricane season once again passed Hannover Rück SE and E+S Rückversicherung AG was reorgan- off unremarkably, a number of natural catastrophe events ised. In property and casualty reinsurance, however, a retro- and other large losses were recorded. The explosion in the cession from Hannover Rück SE to E+S Rückversicherung AG port of the Chinese city of Tianjin was the largest single loss has been maintained. The proportion of Hannover Rück SE’s for Hannover Rück SE, resulting in net loss expenditure of gross written premium attributable to business accepted from EUR 43.1 million. In addition, damage to an oil rig in the Gulf E+S Rückversicherung AG stood at 0.1% (-0.1%) in the year of Mexico and a storm in Japan led to losses of EUR 29.6 mil- under review and relates to the run-off of the 2013 and prior lion and EUR 23.2 million respectively. The total net expend- underwriting years. iture incurred by Hannover Rück SE from large losses was EUR 330.6 million (EUR 257.0 million). Hannover Rück SE: Breakdown of gross premium M 40 Combined management report by individual lines of business in EUR million Ordinary investment income including deposit interest clearly exceeded the previous year’s level to reach EUR 1,737.8 million (EUR 1,589.6 million). This was due principally to higher dis- 1500015.000 14.139 tributions from our investment holding companies. Our expo- 1.590 sure to high-yield fund investments was also a very pleasing 12.000 factor here. Net gains of EUR 94.0 million (EUR 104.0 mil- 12000 11.048 10.865 1.401 10.457 330 lion) were realised on disposals. Write-downs of EUR 83.2 mil- 1.376 1.298 1.424 9.130 1.272 lion (EUR 92.9 million) were taken on investments. They were 1.228 350 9.000 1.175 437 9000 1.045 1.260 attributable almost exclusively to bearer debt securities held as 362 316 288 654 1.120 942 current assets. The write-downs contrasted with write-ups of 749 385 294 414 344 405 434 EUR 5.1 million (EUR 30.5 million) that were made on assets 6.000 732 435 6000 368 5.999 363 written down in previous periods in order to reflect increased 3.894 3.912 4.082 fair values. 3.409 30003.000 All in all, our net investment result improved to EUR 1,695.9 mil- 2.736 2.137 2.275 2.609 lion (EUR 1,580.8 million). 1.800 0 0 2011 2012 2013 2014 2015 The profit on ordinary activities increased to EUR 1,064.0 mil- Other lines Life Marine Aviation Motor lion (EUR 597.8 million). The year under review closed with a profit for the year of EUR 905.8 million (EUR 421.2 million). Accident Casualty Fire

Fire Total gross premium income for the fire line climbed by 22.5% in the 2015 financial year to EUR 1,590.3 million (EUR 1,298.2 million). The net loss ratio improved in the year under review from 61.4% to 53.9%. The underwriting profit climbed to EUR 149.4 million (EUR 140.3 million). An amount of EUR 83.6 million was withdrawn from the equalisation reserve and similar provisions in the year under review, after an allocation of EUR 186.6 million in the previous year.

Hannover Re | Annual Report 2015 61 Casualty Life Gross premium in casualty business climbed by 19.3% to Gross premium income in the life line grew by 47.0% EUR 1,400.9 million (EUR 1,174.7 million). The loss ratio in the financial year just ended to EUR 5,998.7 million decreased from 104.5% to 82.6%. The underwriting result (EUR 4,082.0 million). Business in the year under review was consequently improved to -EUR 69.5 million (-EUR 276.0 mil- still heavily shaped by the generally very challenging market lion). An amount of EUR 139.6 million was allocated to the climate in Europe. Particularly in the markets of Northern and equalisation reserve and similar provisions in the year under Western Europe, conditions continued to be competitive in review; the withdrawal in the previous year had totalled the area of traditional life insurance covers. Asian markets EUR 88.7 million. as well as those of Central and Eastern Europe are exhibiting stronger interest in automated underwriting systems and Accident innovative life insurance concepts. Generally speaking, it was Gross premium increased by 4.4% to EUR 329.8 million noticeable that demand for long-term care and longevity insur- (EUR 316.0 million). The loss ratio rose from 57.4% to ance solutions increased in all markets. Innovative concepts 70.3%. The underwriting result came in at EUR 9.9 million, such as lifestyle products also enjoyed stronger demand. Our after EUR 32.2 million in the previous year. An amount of international orientation is vital to our success in writing new EUR 23.7 million was withdrawn from the equalisation reserve business worldwide. We are thereby able to ensure sustain and similar provisions, following an allocation of EUR 2.9 mil- able earnings growth. lion in the previous year. The underwriting result improved to EUR 163.3 million Motor (-EUR 19.5 million) in the year under review. Our life and Gross premium income for the motor line surged by a very health reinsurance portfolio thus developed in line with our substantial 51.2% to EUR 1,423.6 million (EUR 941.7 million). expectations. Financial solutions business comfortably out- The loss ratio deteriorated to 85.5% (39.1%). The underwrit- performed its target. ing result closed at -EUR 159.4 million (EUR 138.2 million). An amount of EUR 13.1 million was withdrawn from the equalisa- Other lines tion reserve and similar provisions in the year under review, The lines of health, credit and surety, other indemnity insur- after an allocation of EUR 69.3 million in the previous year. ance and other property insurance are reported together under other lines. Other property insurance consists of the extended Aviation coverage, comprehensive householder’s (contents), compre- The gross premium volume rose by a modest 1.8% from hensive householder’s (buildings), burglary and robbery, water EUR 343.6 million to EUR 349.7 million. The loss ratio improved damage, plate glass, engineering, loss of profits, hail, livestock markedly from 102.1% to 77.8%. The underwriting result came and windstorm lines. Other indemnity insurance encompasses in at EUR 2.5 million (-EUR 60.7 million). Following a with- legal protection, fidelity as well as other pure financial losses drawal of EUR 34.4 million in the previous year, an amount of and property damage. EUR 15.5 million was allocated to the equalisation reserve and similar provisions in the year under review. The total premium volume in the other lines climbed by 14.7% to EUR 2,609.4 million (EUR 2,274.9 million). The loss ratio Marine improved to 68.4% (74.1%). The underwriting result closed Gross written premium nudged slightly higher by 0.7% to at EUR 54.0 million, after -EUR 8.9 million in the previous EUR 436.9 million (EUR 433.8 million). The net loss ratio rose year. An amount of EUR 53.4 million (EUR 50.6 million) was from 62.2% to 74.3%. The underwriting result consequently allocated to the equalisation reserve and similar provisions. contracted from EUR 39.4 million to EUR 8.2 million. An amount of EUR 48.2 million (EUR 91.3 million) was allocated to the equalisation reserve and similar provisions.

62 Hannover Re | Annual Report 2015 Assets and financial position

Balance sheet structure of Hannover Rück SE M 41

in EUR thousand 2015 2014 Assets Intangible assets 77,960 75,731 Investments 41,338,228 41,912,302 Receivables 2,959,324 2,405,397 Other assets 331,197 362,095 Prepayments and accrued income 168,241 200,717 Total assets 44,874,950 44,956,242

Liabilities Subscribed capital 120,597 120,597

Capital reserve 880,608 880,608 Combined management report Retained earnings 630,511 380,511 Disposable profit 658,000 515,000 Capital and reserves 2,289,716 1,896,716 Subordinated liabilities 1,500,000 1,500,000 Technical provisions 30,285,024 32,524,999 Provisions for other risks and charges 408,726 452,714 Deposits received from retrocessionaires 8,795,263 7,308,422 Other liabilities 1,596,213 1,273,391 Accruals and deferred income 8 – Total liabilities 44,874,950 44,956,242

Our portfolio of assets under own management grew in the A dividend of EUR 3.00 plus a special dividend of EUR 1.25 year under review to EUR 25.7 billion (EUR 23.0 billion). This per share, equivalent to EUR 512,5 million (EUR 361.8 million), corresponds to an increase of 11.8% and can be attributed was paid in the year under review for the 2014 financial year. above all to the very positive operating cash flow and the appreciation of various currencies against the euro. The bal- It will be proposed to the Annual General Meeting on 10 May ance of unrealised gains on fixed-income securities and bond 2016 that a dividend of EUR 3.25 plus a special dividend of funds contracted to EUR 610.3 million (EUR 891.3 million). EUR 1.50 per share should be paid for the 2015 financial year. This reflected the yield increases observed in the course of This corresponds to a total distribution of EUR 572.8 million. the year under review – especially on US Treasuries – as well The dividend proposal does not form part of this consolidated as higher risk premiums for corporate bonds. financial statement.

Deposits with ceding companies, which are shown under the investments, totalled EUR 15.6 billion (EUR 18.9 billion) in the year under review.

Our capital and reserves – excluding the disposable profit – stood at EUR 1,631.7 million (EUR 1,381.7 million). The total capital, reserves and technical provisions – comprised of the capital and reserves excluding disposable profit, the subordinated liabilities, the equalisation reserve and similar provisions as well as the net technical provisions – fell during the year under review to EUR 33,416.7 million (EUR 35,406.7 million). The balance sheet total of Hannover Rück SE consequently decreased to EUR 44.9 billion (EUR 45.0 billion).

Hannover Re | Annual Report 2015 63 Risks and opportunities Outlook

The business development of Hannover Rück SE is essentially In view of the interrelations between the parent company and subject to the same risks and opportunities as that of the Han- the Group companies and the former’s large share of business nover Re Group. As a general principle, Hannover Rück SE within the Group, we would refer here to our remarks contained shares in the risks of participating interests and subsidiaries in the section entitled “Outlook for 2016” on page 132 et seq., according to the amount of its respective holding. The risks which also reflect in particular the expectations for Hannover are set out in the risk report. The relations with participating Rück SE. In terms of the dividend for the current financial interests of Hannover Rück SE may also give rise to losses from year, we envisage a payout ratio in the range of 35% to 40% legal or contractual contingent liabilities (particularly novation of the IFRS Group net income. This ratio may increase in light clauses and guarantees). Please see our explanatory remarks of capital management considerations if the present comfort- in the notes to this report. able level of capitalisation remains unchanged.

Other information

We received an adequate consideration for all transactions with affiliated companies according to the circumstances of which we were aware at the time when the transactions were effected. We incurred no losses requiring compensation as defined by § 311 Para. 1 Stock Corporation Act (AktG).

Hannover Rück SE maintains branches in Australia, Bahrain, Canada, China, France, Korea, Malaysia, Sweden and the United Kingdom.

64 Hannover Re | Annual Report 2015 Other success factors

Our staff

Key personnel ratios The survey was conducted in October 2015 with the support of an external opinion research and management consulting firm. The Hannover Re Group employed 2,568 staff as at 31 Decem- Overall participation came in at a solid level of just under 70% ber 2015 (previous year: 2,534). The turnover ratio at Home of all surveyed staff. A very high degree of overall satisfaction Office in Hannover of 2.5% (1.5%) was higher than the level among our staff can be identified as a central finding. This is of the previous year. The rate of absenteeism – at 3.8% – was true both of the average evaluation across all questions and for slightly higher than in the previous year (3.6%). The turnover virtually all individual questions. The considerable motivation ratio and rate of absenteeism continue to be below the average and dedication expressed by our staff is especially gratifying. expected across the industry as a whole. As far as potential scope for improvement is concerned, they Combined management report identified a more broad-based system of remuneration and Staff turnover / absenteeism Hannover Home Office M 42 further optimisation of the support provided for their ongoing in % individual training.

On the basis of these insights we shall evaluate the findings 55 in detail in the current financial year and initiate measures. 4.3 The goals will be to leverage higher-order potential scope 4 3.8 for improvement and to support the individual units as they 4 3.6 3.4 3.5 3.4 explore the findings of relevance to them.

33 2.8 2.8 2.5 Learning management system successfully implemented 22 1.5 Another focus of our activities in the financial year just ended 11 was the implementation of a state-of-the-art learning management system – the HannoverReAcademy. This process was launched in 2014 by means of an evaluation project, followed 00 in 2015 by the roll-out of the selected program. Since then, we 2011 2012 2013 2014 2015 have been able to offer our staff a clear overview of all inter- Turnover Absenteeism nal seminar opportunities from the areas of HR and IT in the form of a training catalogue. Similarly, all booking, approval and administration processes are run using this application.

First international employee survey HannoverReAcademy additionally serves as the platform for conducted operating our e-learning programmes. We have been successfully using these for a number of years in a blended learning In the financial year just ended we carried out an international, format, i. e. in combination with face-to-face tutorials, as part Group-wide employee survey for the first time. The purpose of of the international basic training provided to our new mem- this survey was, in the first place, to continue the dialogue ini- bers of staff. tiated in recent years on a consistent understanding of values and leadership. For this reason, the questions centred above all on the extent to which our Values and Management Princi- ples – which have been defined as mandatory Group-wide – are known and embodied in practice. Secondly, we inquired into our employees’ connection and dedication to the company and explored the status of (international) cooperation.

Hannover Re | Annual Report 2015 65 It is also pleasing to note that the launch of HannoverReAcad- Breakdown of employees by country M 43 emy has enabled us to streamline what used to be more of a patchwork of administrative processes. Henceforth, for exam- 2015 2014 ple, a package of entry-level seminars is automatically booked Germany 1,337 1,289 for every new employee based on the experience that we have USA 283 285 gained over the years. This is all done on a worldwide basis South Africa 156 164 because our international units also have access to Hannover- United Kingdom 156 200 ReAcademy. In this way we ensure that the standard of train- Australia 103 100 ing given to our workforce is of a consistently high standard. Sweden 92 89 China 72 70 Recruiting activities stepped up France 54 52 Malaysia 53 53 We went to special lengths to refresh our efforts to recruit new Ireland 51 48 personnel. In recent years we had already enjoyed consistent Bahrain 46 45 success in attracting new staff in a timely manner who fulfil Bermuda 45 43 our quality requirements. Nevertheless, in the financial year Colombia 27 26 just ended – working in conjunction with the other areas of India 27 8 our company that play an active part in our external profile – Canada we revamped our online presence. Along similar lines to our 16 11 entire corporate website, the careers section now features a Italy 11 11 fresh contemporary design. At the same time we improved the Korea 10 10 information provided on our webpages as well as the ability to Mexico 7 6 search the content systematically. Spain 7 7 Japan 7 9 We attached special emphasis to expanding our efforts to Taiwan 4 4 address the applicant groups most relevant to our company in Brazil 4 4 a targeted manner through short film clips. The centrepiece in this regard is a new personnel marketing video that high- Total 2,568 2,534 lights aspects of particular importance to our target applicant groups – specifically, the challenging nature of the work, the pleasant working atmosphere and the international dimension. Word of thanks to our staff This image video is flanked by four newly produced testimo- nials, in which members of staff describe their roles and the The Executive Board would like to thank all employees for their associated appeal of their work from their own individual per- dedication in the past year. At all times the workforce identified spectives. The goal is to offer potential recruits a straightfor- with the company’s objectives and successfully pursued them. ward and engaging insight into the diversity and fascination We would also like to express our appreciation to the repre- of our tasks and to encourage them to apply. The range of sentatives of staff and senior management who participated in video materials is rounded off with some recordings of public our co-determination bodies for their critical yet always con- appearances or interviews featuring our personnel advisers, structive cooperation. who offer practical tips on the application process and choos- ing the right employer.

66 Hannover Re | Annual Report 2015 In addition to our continuous engagement with the changing Sustainability at Hannover Re legal framework conditions, since 2003 we have provided an annual Declaration of Conformity with the German Corporate Governance Code (DCKG); this is published on our corporate The Sustainability Strategy of the website and can also be found on page 99 et seq. of the present Hannover Re Group Annual Report. The Corporate Governance principles of Han- nover Rück SE are also subject to regular review and fulfil the For Hannover Re, sustainability means a commitment to recommendations of the currently valid version of the German responsible and transparent enterprise management that is Corporate Governance Code. geared to lasting corporate success. With this in mind, in 2011 we drew up a Sustainability Strategy for Hannover Re that Given that the trust of our stakeholder groups and an immacu- reflects in concrete terms the higher-order corporate strategy late reputation are vital to the success of our company, we also of the Group and in which we explicitly commit to our strategic make every effort to cultivate an active dialogue with repre- objective of sustainable value creation. sentatives of the capital market and society as a whole as well as with our clients and staff. In the year just ended we again In 2014 we reviewed our Group Strategy and Sustainability reported on our achievements as a responsible enterprise in Strategy in keeping with our three-year strategy cycle. In con- the form of a stand-alone Sustainability Report. In this regard Combined management report formity with the Group Strategy, the sustainability goals that we follow the currently applicable and internationally recog- had been set for the strategy cycle just ended were therefore nised guidelines of the Global Reporting Initiative (GRI); we similarly revisited and modified to reflect the changing general fulfil Application Level B – the intermediate level of transpar- business conditions. Sustainability goals that had still to be ency – as defined by the GRI. achieved were carried over to the new strategy cycle. Our current Sustainability Strategy for the years 2015 to 2017 defines In 2015 Hannover Re’s sustainability performance was again the following four action fields and specifies 14 concrete goals evaluated by the rating agency Oekom Research; our company and 42 measures: was awarded “Prime” status in recognition of its above-average fulfilment of industry-specific requirements. In addition, • Governance and dialogue in June 2015 Hannover Re received confirmation of its inclu- • Product responsibility sion in the worldwide FTSE4Good Index Series from the FTSE • Employees Environmental, Social and Governance Advisory Committee. • Environment and society

For details of Hannover Re’s current Sustainability Strategy Product responsibility please see www.hannover-re.com/60729/sustainability Our range of reinsurance products and services is geared to the needs of the market and our clients. Hannover Re is active in Governance and dialogue virtually all lines of reinsurance business. Our products range from traditional reinsurance to complex individual solutions for As an internationally operating company, Hannover Re bears risk transfer and the optimisation of our clients’ capital require- responsibility in various senses. This is true of its compliance ments. As a leading player in the reinsurance industry, the com- with relevant laws and regulations, but also applies to its rela- mercial success of Hannover Re is crucially dependent on the tionship with staff, shareholders, the public at large and the correct assessment of present and emerging risks. In the pro- cultures within which the company operates. As a European cess of evaluating risks we are faced today with growing com- company (Societas Europaea – SE) based in Germany, the plexity as a consequence of the increasing importance attached formal framework that shapes Hannover Re’s corporate gov- to various aspects of sustainability. These emerging risks have ernance is determined by national (German) law. The funda- recently included not only the rising prevalence of geopoliti- mental hallmarks of this corporate governance are a two-tier cal and economic uncertainties but also developments such as system with its transparent and effective split into management demographic change, shifting mobility patterns in populations, (Executive Board) and its oversight (Supervisory Board), the increasing digitalisation and the resulting cyber risks as well appointment of shareholder and employee representatives to as climate changes and the associated discussions centred on the Supervisory Board and the rights of co-administration and food and water security. By organising topically specific con- supervision exercised by shareholders at the Annual General ferences, visiting clients and attending trade fairs and expert Meeting. The interplay between these bodies is regulated by gatherings we enable our customers to share our knowledge German stock corporation law and by the company’s Articles and we use the internally and externally acquired insights in of Association. Furthermore, our Group Strategy, the Corpo- order to be able to offer them better or innovative (re)insur- rate Governance principles and our Code of Conduct form the ance solutions and to strengthen our customer relationships. basis of our enterprise management.

Hannover Re | Annual Report 2015 67 When it comes to the management of our investment portfolio, Environment and society we aim to generate a commensurate market return in the interests of our clients and shareholders. This is done in accordance Hannover Re does its utmost to keep negative environmen- with our Sustainability Strategy by incorporating ESG (envi- tal impacts of its business operations as low as possible. The ronmental, social and governance) criteria into our investment focus of our efforts to conserve the environment is on reduc- policy. Specifically, since 2012 we have been guided by the ten ing carbon dioxide (CO2) emissions associated with the supply principles of the United Nations Global Compact and thus also of electricity and heating to our premises as well as with our recognise the aspects of human rights, working conditions, business travel. Having already converted our power supply the environment and anti-corruption. Since 2013 our invest- at the German location to renewables, we now want to extend ments have been reviewed half-yearly to verify compliance with this progressively to our international offices as well. With the these ESG standards. If a breach of the criteria is identified, we implementation of our Environmental Management System, part with the instrument in question and exclude it from our which was certified according to DIN EN ISO 14001 in 2012, investment universe. As we develop and continuously review we have put in place standard processes for dealing with envi- our investment strategy, we work together with an established ronmental protection and defined concrete measures in the service provider that specialises in sustainability. In the context environmental programme. Our Environmental Management of our Sustainability Strategy we have set ourselves the goal System was successfully recertified in November 2015. of expanding our ESG guidelines for investment management. We intend to refine our ESG Investment Policy, including the Hannover Re’s carbon dioxide emissions at its German loca- development of positive screening. tion in 2015 amounted to 8,581 (previous year: 7,798) tonnes, some 10.0% more than in the previous year. This is equivalent

to per capita CO2 emissions of 6.4 tonnes (+6.7% compared Employees to the previous year).

Employing successful members of staff on a long-term basis In 2015, as in previous years, we compensated for our una- is one of the ten key points of our Group Strategy. In order to voidable CO2 emissions of 8,306 (7,514) tonnes caused by busi- ensure that we are always perceived as an attractive employer ness travel by making voluntary offsetting payments to the by our existing staff and potential new junior recruits, we pay international organisation “atmosfair” and thereby supported special attention to their skills and further growth. The health selected climate protection projects in developing and emerg- and well-being of our staff are also vital to the sustainable ing countries. This is equivalent to an offset of around 97% of development of our business. The focus of our efforts is there- our total CO2 emissions resulting from business travel and the fore on the prevention of disease, e. g. through medical check- consumption of electricity, district heating and paper. ups by the company physician, workplace inspections, advice and treatment relating to matters of general medicine as well In the financial year just ended, as in prior years, we reported as a range of sporting opportunities designed to promote a on our measures to reduce carbon dioxide emissions as part of healthy lifestyle. the international initiative overseen by the Carbon Disclosure Project (CDP); in this context we achieved a disclosure score We also stress the importance of enabling our employees to of 91 out of a possible 100 points. strike the right balance between their career and private life. Consequently, we offer individually customisable part-time and telecommuting models as well as flexitime working arrangements with no core hours. By offering such flexibility we want to help our employees organise their daily routine in various stages of life such as starting a family or preparing for retirement, e. g. through partial retirement opportunities for older staff. One of the cornerstones of our successful business activities, along with skills and commitment, is the high degree of diversity in our workforce – since this is vital to safeguarding our high global quality standard. The workforce at Hannover Home Office alone is comprised of 39 different nations, reflecting the international dimension of our business activities. Fostering this diversity is similarly enshrined in our Sustainability Strategy.

68 Hannover Re | Annual Report 2015 The table below breaks down Hannover Re’s consumption and emissions over the past five years.

Resources consumed at Hannover Home Office M 44

2015 2 2014 2 2013 2 2012 2 2011 1 Number of staff 1,337 1,289 1,219 1,164 1,110 Electricity (in kWh) 8,868,345 8,969,975 9,114,482 8,802,262 8,214,917 Heat (in kWh) 2,746,698 2,748,014 3,359,694 2,319,854 1,859,119 Water (in l) 17,088,000 15,176,000 15,778,000 14,961,000 14,464,500 Paper (in sheets) 6,600,810 7,551,200 8,502,060 8,766,000 9,172,180 Waste (in kg) 156,880 193,760 214,250 205,790 257,400 Business trips (in km) 20,530,043 20,447,867 18,185,062 16,654,504 17,658,598

3 CO2 emissions (in kg) 8,581,000 7,798,000 7,203,000 4,984,000 8,123,000

1 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Hannover

2 Karl-Wiechert-Allee 50, Roderbruchstrasse 21 and 26 as well as infant daycare centre, Karl-Wiechert-Allee 57 (pro rata), Hannover Combined management report 3 Radiative Forcing Index: 2.7

Our commitment to society has a long tradition. Hannover Re Detailed explanatory remarks on our consumption of resources has been active as a sponsor of culture and social projects for as well as extensive information on our social commitment can several decades. Our activities extend beyond our location in be found at www.hannover-re.com/60729/sustainability Germany to our subsidiaries with their specific projects catering to social concerns in their own country. Content-wise, we con- centrate our non-profit activities today on the areas of research, learning, art and music as well as on assisting our employees with their voluntary contributions to society. Our involvement encompasses not only projects in Germany but also activities at our international locations.

Hannover Re | Annual Report 2015 69 Nelson Mandela statue, Union Buildings, Pretoria, South Africa

70 Hannover Re | Annual Report 2015 Always …

… i nnovative

Innovative in lifestyle matters People with a healthy lifestyle are – at least statistically speaking – less susceptible to disease and disability. Lifestyle programmes are designed to motivate people to live a healthy life. This means that insurers can grant premium discounts, extend the scope of coverage or offer attractive rewards – while at the same time having to make lower claims payments. Hannover Re participates in such lifestyle programmes, contributing its know-how and helping its customers to carry the risk. The concepts developed for the South African market have the potential to grow into the largest incentive-based scientific wellness programme in the world; they have already been successfully adopted in other countries.

Hannover Re | Annual Report 2015 71 Opportunity and risk report

Risk report • We are well capitalised. Our available capital comfortably exceeds the required capital. • We are convinced that our Group-wide risk management system gives us a transparent overview of the current risk situation at all times and that we fulfil the requirements placed on the risk management system by Solvency II.

Strategy implementation 1. We adhere to the risk appetite set by the Executive Board. Our current corporate strategy encompasses ten guiding prin- 2. We integrate risk management into value-based ciples that safeguard the realisation of our vision “Long-term management. success in a competitive business” across the various divisions. 3. We promote an open risk culture and the transparency For further information on the corporate strategy and the stra- of our risk management system. tegic principles in detail please see the section entitled “Our 4. We strive for the highest ERM rating and a comfortable strategy” on page 16 et seq. The following principles of the level of capital adequacy under Solvency II. corporate strategy constitute the key strategic points of depar- 5. We determine a materiality threshold for our risks. ture for our Group-wide risk management: 6. We make use of appropriate quantitative methods. 7. We apply well-suited qualitative methods. • We manage risks actively. 8. We allocate our capital risk-based. • We maintain an adequate level of capitalisation. 9. We ensure the necessary separation of functions • We are committed to sustainability, integrity and through our organisational structure. compliance. 10. We assess the risk contribution from new business areas and new products. The risk strategy is derived from our corporate strategy. It forms the core element in our handling of opportunities and The risk strategy is similarly specified with an increasing risks. The risk strategy specifies more closely the goals of risk degree of detail on the various levels of the company. management and documents our understanding of risk. We have also defined ten overriding principles within our risk strategy:

Implementation of strategy M 45

Corporate strategy

Risk strategy

Framework Guideline on Risk Management

Limit and threshold system for the material risks of the Hannover Re Group

Central guidelines: e. g. investments, exposure management, central underwriting guidelines (property & casualty, life & health reinsurance)

Local guidelines: e. g. local underwriting guidelines, signature rules, local contingency plans, deputising arrangements

72 Hannover Re | Annual Report 2015 The risk strategy and the major guidelines derived from it, Major external factors influencing risk such as the Framework Guideline on Risk Management and the management in the financial year just central system of limits and thresholds, are reviewed at least ended once a year. In this way we ensure that our risk management system is kept up-to-date. Regulatory developments: Further more concrete aspects of Solvency II were defined in the 2015 financial year, including We manage our total enterprise risk such that we can expect the decision by lawmakers to adopt a revised version of the to generate positive Group net income with a probability of Insurance Supervision Act with effect from 1 January 2016 90% p. a. and the likelihood of the complete loss of our eco- and thereby translate European standards into national law. nomic capital and shareholders’ equity does not exceed 0.03% The Hannover Re Group has systematically implemented all p. a. These indicators are monitored using our internal capital requirements to date. Following intensive preparations the model and the Executive Board is informed quarterly about Hannover Re Group received approval to calculate its solvency adherence to these key parameters as part of regular report- requirements using its internal model when Solvency II comes ing. The necessary equity resources are determined according into effect. The approved model covers the underwriting, mar- to the requirements of our economic capital model, solvency ket and counterparty default risks that are most relevant to regulations, the expectations of rating agencies with respect enterprise management. Our internal model enables us to opti- to our target rating and the expectations of our clients. Above mally map the risk structure of our reinsurance business and Combined management report and beyond that, we maintain a capital cushion in order to be our investments, which would not be possible using a stand- able to act on new business opportunities at any time. ard model. Regulatory approval also means that the risks can be better reflected when determining the regulatory capital Strategic targets for risk position M 46 requirements. Our internal target capitalisation with a confidence level of 99.97% comfortably exceeds the target level Limit 30.9.2015 of 99.5% under Solvency II, thereby ensuring a comfortable Probability of positive net income > 90% 96.9% level of capital adequacy under Solvency II if the internal tar- Probability of loss of get is achieved. shareholders’ equity < 0.03% 0.01% Probability of loss of The core functions of Solvency II – the risk management func- economic equity < 0.03% < 0.01% tion, the actuarial function, the compliance function and the internal audit function – have been implemented. In fulfilling the new supervisory requirements for core functions, we were able to build on existing processes and organisational structures. In 2015 we comprehensively fulfilled the supervisory reporting requirements during the preparatory phase for Sol- vency II, inter alia by compiling a Regular Supervisory Report (RSR) and a report on the Own Risk and Solvency Assessment (ORSA) for Hannover Rück SE and other European insurance companies within the Group.

Parallel to the regulatory developments in Europe, we are seeing adjustments worldwide to the regulation of (re)insurance undertakings. It is often the case that various local supervisory authorities take their lead from the principles of Solvency II or the requirements set out by the International Association of Insurance Supervisors (IAIS).

Hannover Re | Annual Report 2015 73 Solvency II: Hannover Re is prepared M 47

Solvency II

Pillar 1 Pillar 2 Pillar 3 Quantitative requirements Qualitative requirements Disclosure requirements • Capital requirements • Internal controls, risk man- • to the regulator and the public (SCR / MCR *) agement and key functions • with the goal of market trans- • Own funds (solvency balance • Internal risk assessment parency and market discipline sheet) • Supervisory review procedure • Standard model and internal model

Hannover Re

Hannover Re has received Hannover Re has long had We help our clients to fulfil the approval for its partial internal in place an internal control requirements of Solvency II model. Internal and external system, the necessary key through flexible product design risk quantification are there- functions and extensive risk and a regular exchange of fore largely consistent. Super- management. Additional experience. visory capital requirements requirements arising out of can continue to be efficiently Solvency II have become estab- implemented. lished along existing processes.

* SCR = Solvency Capital Requirement; MCR = Minimum Capital Requirement

Capital market environment: Another major external influ- calculated according to market-consistent measurement princi- encing factor is the protracted low level of interest rates, espe- ples and also constitutes the basis for calculating the own funds cially with an eye to the return on our investments. For further under Solvency II. Hannover Re’s internal capital model reflects information please see the “Investments” section of the man- all risks that influence the development of the economic capital. agement report on page 51 et seq. These are split into underwriting risks, market risks, counterparty default risks and operational risks. For each of these risk classes we have identified a number of risk factors for which we Risk capital define probability distributions. These risk factors include, for example, economic indicators such as interest rates, exchange In the interests of our shareholders and clients we strive to rates and inflation indices, but also insurance-specific indica- ensure that our risks remain commensurate with our capital tors such as the mortality of a particular age group within our resources. Our quantitative risk management provides a uni- portfolio of insureds in a particular country or the number of form framework for the evaluation and steering of all risks natural catastrophes in a certain region and the insured loss affecting the company as well as of our capital position. In amount per catastrophe. The specification of the probability this context, the internal capital model is our central tool. The distributions for the risk factors draws upon historical and pub- internal capital model of the Hannover Re Group is a stochas- lically available data as well as on the internal data resources of tic enterprise model. It covers all subsidiaries and business the Hannover Re Group. This process is further supplemented groups of the Hannover Re Group. The central variable in risk by the know-how of internal and external experts. The fit of the and enterprise management is the economic capital, which is probability distributions is regularly checked by our specialist

74 Hannover Re | Annual Report 2015 departments, although more importantly it is also verified in the context of the regular, company-wide use of the capital model when assessing risks and allocating the cost of capital. Hannover Re calculates the required risk capital as the Value at Risk (VaR) of the economic change in value over a period of one year with a confidence level of 99.97%. This reflects the goal of not exceeding a one-year ruin probability of 0.03%. The internal target capitalisation of the Hannover Re Group is therefore significantly higher than the minimum confidence level of 99.5% required under Solvency II.

Irrespective of regulatory reporting requirements, the Han- nover Re Group regularly calculates its capitalisation in accordance with Solvency II, i. e. in accordance with the approved internal model (partial model). The capital requirements for market risks, underwriting risks and counterparty default risks are determined on this basis. The capital requirement for oper- Combined management report ational risks, on the other hand, is calculated according to the parameters of the Solvency II standard formula. The own funds are based on the economic capital, with non-controlling interests not fully recognised as required by Solvency II. The capital adequacy ratio of the Hannover Re Group calculated in accordance with the parameters of Solvency II stood at 221% as at 30 September 2015.

All figures on the risk capital provided below are based on the full internal model of the Hannover Re Group: our excess capital coverage at the target confidence level of 99.97% was very comfortable at 131.5% as at 30 September 2015. Hannover Re is well capitalised and our available capital comfortably exceeds the required capital:

Available capital and required risk capital M 48

in EUR million 30.9.2015 31.12.2014 Available economic capital 12,614.7 12,443.9 Confidence level 99.97% 99.5% 99.97% 99.5% Required risk capital 9,593.0 5,126.3 7,786.6 4,353.1 Excess capital 3,021.7 7,488.4 4,657.3 8,090.8 Capital adequacy ratio 131.5% 246.1% 159.8% 285.9%

We hold additional capital above all to meet the requirements management, the consistent and systematic implementation of the rating agencies for our target rating and to be able to of corporate strategy by management and its excellent capi- act flexibly on business opportunities. We strive for a rating tal resources. Hannover Re’s internal capital model was also from the rating agencies most relevant to our industry that subjected to expert appraisal. Based on this review, Stand- facilitates and secures our access to all reinsurance business ard & Poor’s factors the results of the Hannover Re Group’s worldwide. Hannover Re is analysed by the rating agencies internal capital model into the determination of the target cap- Standard & Poor’s (S & P) and A. M. Best as part of an inter- ital for the rating. active rating process. The current financial strength ratings are assessed as “AA-” (Very Strong, stable outlook) by Stand- ard & Poor’s and “A+” (Superior, stable outlook) by A. M. Best. Standard & Poor’s evaluates Hannover Re’s risk management as “Very Strong”, the best possible rating. In this regard particular mention was made of the company’s very good risk

Hannover Re | Annual Report 2015 75 Organisation and processes of risk management

Hannover Re has set up risk management functions and bodies Group-wide to safeguard an efficient risk management system. The organisation and interplay of the individual functions in risk management are crucial to our internal risk steering and control system. The central functions of risk management are closely interlinked in our system and the roles, tasks and reporting channels are clearly defined and documented in terms of the so-called “3 lines of defence”. The first line of defence consists of risk steering and the original risk responsibility on the divisional or company level. Risk management ensures the second line of defence – risk monitoring. It is supported in this regard by the actuarial function and the compliance function. The third line of defence is the process-independent monitoring performed by the internal audit function. The following chart provides an overview of the central functions and bodies within the overall system as well as of their major tasks and powers.

76 Hannover Re | Annual Report 2015 Central functions of risk monitoring and steering M 49

Supervisory Board Advising and supervising the Executive Board in its management of the company, inter alia with respect to risk management, on the basis of the Supervisory Board’s Rules of Procedure

Executive Board Overall responsibility for Group-wide risk management and definition of the risk strategy

2nd line of defence 2nd line of defence 3rd line of defence Combined management report Risk Committee Operational risk management, monitoring and coordinating body as well as implementation and safeguarding of a consistent Group-wide risk management culture

Group Risk Chief Risk Actuarial Compliance Group Management Officer function function Auditing Risk monitoring Responsibility for Ensures adequacy Monitoring of Process-independ- across the Group holistic risk monitor- of the methods used areas where mis- ent and Group- as a whole and the ing across the Group and underlying conduct can result wide monitoring business groups of as a whole and the models in relation in civil actions or on behalf of the all material risks business groups of to calculation of the criminal / adminis- Executive Board from the company all material risks technical provisions trative proceedings perspective from the Group perspective

supported by supported by supported by supported by local risk management local risk management local actuarial local compliance functions functions functions functions

1st line of defence

Subsidiaries, branches, service companies, representative offices as well as treaty / regional and service divisions within the business groups of Property & Casualty reinsurance, Life & Health reinsurance and investments Risk steering and original risk responsibility for risk identification and assessment on the divisional and company level

Group-wide risk communication and an open risk culture are important to our risk management. Regular global meetings attended by the actuarial units and risk management functions serve as a central anchor point for strategic considerations in relation to risk communication.

Hannover Re | Annual Report 2015 77 Key elements of our risk management overall risk position is performed by Group Risk Management system using the Hannover Re risk model. The model makes allowance as far as possible for risk accumulations and concentrations. Our risk strategy, the Framework Guideline on Risk Manage- ment and the system of limits and thresholds for material risks Risk steering of the Hannover Re Group describe the central elements of The steering of all material risks is the task of the operational our risk management system. The risk management system business units on the divisional and company level. In this con- is subject to a constant cycle of planning, action, control and text, the identified and analysed risks are either consciously improvement. Systematic risk identification, analysis, meas- accepted, avoided or minimised. The risk / reward ratio and the urement, steering and monitoring as well as risk reporting are required capital are factored into the division’s decision. Risk especially crucial to the effectiveness of the system as a whole. steering is assisted by, among other things, the parameters of the central and local underwriting guidelines and by defined The Framework Guideline on Risk Management describes, limits and thresholds. among other things, the major tasks, rights and responsibilities, the organisational framework conditions and the risk con- Risk monitoring trol process. The rules, which are derived from the corporate The monitoring of all identified material risks is a core task of strategy and the risk strategy, additionally take account of the Group Risk Management. This includes, inter alia, monitor- regulatory minimum requirements for risk management as well ing execution of the risk strategy as well as adherence to the as international standards and developments relating to appro- defined limits and thresholds and to risk-related methods and priate enterprise management. processes. A further major task of risk monitoring is the ascer- tainment of whether risk steering measures were carried out Risk-bearing capacity concept and whether the planned effect of the measures is sufficient. The establishment of the risk-bearing capacity involves determining the total available risk coverage potential and calcu- Risk communication and risk culture lating how much of this is to be used for covering all material Risk management is firmly integrated into our operational pro- risks. This is done in conformity with the parameters of the cesses. It is assisted by transparent risk communication and risk strategy and the risk appetite defined by the Executive the open handling of risks as part of our risk culture. Risk Board. The quantitatively measurable individual risks and the communication takes the form, for example, of internal and risk position as a whole are evaluated using our risk model. A external risk reports, information on current risk complexes central system of limits and thresholds is in place to monitor in the intranet and training opportunities for staff. The regular material risks. This system incorporates – along with other sharing of information between risk-steering and risk-moni- risk-related key figures – in particular the indicators derived toring units is also fundamental to the proper functioning of and calculated from the risk-bearing capacity. Adherence to risk management. the overall risk appetite is verified on an ongoing basis using the results of the risk model. Risk reporting Our risk reporting provides systematic and timely information Risk identification about all material risks and their potential implications. The A key source of information for monitoring risks is the risk central risk reporting system consists primarily of regular risk identification carried out on a rotating basis. All identified risks reports, e. g. on the overall risk situation, adherence to the are documented in the central register containing all material parameters defined in the risk strategy or on the capacity utili- risks. Risk identification takes the form of, for example, struc- sation of natural catastrophe scenarios. Complementary to the tured assessments, interviews or scenario analyses. External regular risk reporting, immediate internal reporting on material insights such as recognised industry know-how from relevant risks that emerge at short notice takes place as necessary. The bodies or working groups are incorporated into the process. already existing range of risk reports will be supplemented in Risk identification is important for ensuring that our risk man- the context of Solvency II implementation by further reports, agement consistently remains up-to-date. including for example the “Regular Supervisory Report” (RSR) and the “Solvency and Financial Condition Report” (SFCR). Risk analysis and assessment In principle, every risk that is identified and considered mate- Process-integrated / -independent monitoring and rial is quantitatively assessed. Only risk types for which quan- quality assurance titative risk measurement is currently impossible or difficult Irrespective of internally assigned competencies, the Execu- are qualitatively assessed (e. g. strategic risks or reputational tive Board is responsible for the orderly organisation of the risks). Qualitative assessment takes the form of inter alia expert company’s business. This also encompasses monitoring of the evaluations. Quantitative assessment of material risks and the internal risk steering and control system. Process-independent

78 Hannover Re | Annual Report 2015 monitoring and quality assurance of risk management is car- We use a central IT solution with standardised accounting and ried out by the internal audit function and external instances consolidation processes, posting rules and interfaces for data (regulators, independent auditors and rating agencies). Most delivery in order to draw up the consolidated financial state- notably, the independent auditors review the trigger mecha- ment. Access rights for the reporting systems are assigned nism and the internal monitoring system. The entire system through an approval process. All components of the account- is rounded off with process-integrated procedures and rules, ing-related internal control system, the processes for the organ- such as those of the internal control system. isation and implementation of consolidation tasks and for the preparation of the consolidated financial statement as well as the accompanying controls are consistently documented. In Internal control system order to safeguard and continuously improve the adequacy of the control system it is subject to regular review and evalua- We organise our business activities in such a way that they are tion. In this regard, the internal audit function ensures that the always in conformity with all legal requirements. The internal quality of the control system is constantly monitored. All rele- control system (ICS) is an important subsystem that serves, vant accounting principles are collated in a Group Accounting among other things, to secure and protect existing assets, Manual that sets out uniform Group-wide rules for the recogni- prevent and reveal errors and irregularities and comply with tion, measurement and reporting of items in the consolidated laws and regulations. The core elements of Hannover Re’s ICS financial statement. The process for updating and, if neces- Combined management report are documented in a Framework Guideline that establishes a sary, adjusting these rules is clearly regulated with respect to common understanding of the differentiated execution of the information channels, responsibilities and period of validity. necessary controls. In the final analysis, it is designed to sys- Not only that, we provide prompt Group-wide notification of tematically steer and monitor the implementation of our cor- significant developments and modified requirements in Group porate strategy. The Framework Guideline defines concepts, financial reporting. stipulates responsibilities and provides a guide for the description of controls. In addition, it forms the basis for the accom- Within the scope of our control system the Group companies plishment of internal objectives and the fulfilment of external are responsible for Group-wide adherence to the accounting requirements imposed on Hannover Re. The ICS consists of policies and the internal control guidelines. The managing systematically structured organisational and technical meas- directors and chief financial officers of the Group companies ures and controls within the enterprise. This includes, among defined as material in our control system affirm to the Execu- other things: tive Board of Hannover Rück SE at each closing date the com- pleteness, correctness and reliability of the financial data that • the principle of dual control, they pass on to Group Accounting. Data for the preparation of • separation of functions, the consolidated financial statement is delivered using a net- • documentation of the controls within processes, worked IT application. The relevant data for Group financial • and technical plausibility checks and access privileges reporting is collected in a database and processed via auto- in the IT systems. matic interfaces in a consolidation system. As part of the financial reporting process we perform preventive and detective The proper functioning of the ICS necessitates the involvement checks on the reported figures in order to minimise the prob- of management, executive staff and employees on all levels. ability and reduce the impacts of a potentially incorrect disclosure. Depending upon the results of our checks, these figures The financial reporting of the parent company and the Group can be corrected if necessary. Given that our Group financial must satisfy international and national financial reporting reporting is heavily dependent on IT systems, these systems standards as well as regulatory requirements. This is safe- also need to be subject to controls. Authorisation concepts reg- guarded in the area of accounting and financial reporting by ulate system access and for each step content-based as well processes with integrated controls which ensure the complete- as system-side checks have been implemented, by means of ness and accuracy of the annual and consolidated financial which errors are analysed and promptly eliminated. statements. A structure made up of differentiated criteria, control points and materiality thresholds assures our ability to identify and minimise the risk of material errors in the annual and consolidated financial statements at an early stage.

Hannover Re | Annual Report 2015 79 Internal risk assessment Reconciliation (economic capital / shareholders’ equity) M 50

In the following section we compare the available economic in EUR million 30.9.2015 31.12.2014 capital with the required risk capital. Hannover Re calculates Shareholders’ equity 8,428.1 8,253.0 the economic equity as the difference between the market-con- Adjustments for assets under sistent value of the assets and the market-consistent value of own management 510.6 555.5 the liabilities. While fair values are available for most invest- Adjustments for technical 1 ments, the market-consistent valuation of reinsurance treaties provisions 3,791.0 3,063.3 necessitates a specific valuation model. We establish the mar- Adjustments due to tax effects and other 2 (1,698.6) (1,414.4) ket-consistent value of technical items as the present value of Economic equity projected payments using actuarial methods. This is adjusted 11,031.1 10,457.4 by a risk loading that factors in the fluctuation in future pay- Hybrid capital 1,583.6 1,986.5 ments. Such fluctuations result from risks that cannot be Available economic capital 12,614.7 12,443.9 hedged by means of capital market products, such as underwriting risks. For the discounting of future cash flows we use 1 Adjustments for technical provisions in life & health and the risk-free basic yield curves without volatility adjustment or property & casualty reinsurance incl. risk margin 2 Includes the deduction of foreseeable dividends, which in the 2014 matching adjustment calculated in accordance with Solvency II Annual Report was still shown as part of adjustments of the technical rules. Market prices for options and guarantees embedded in provisions insurance contracts are determined or approximated using option valuation models from the field of financial mathematics. The required risk capital of the Hannover Re Group at the tar- The significance of these options and guarantees in our port- get confidence level of 99.97% rose to EUR 9,593.0 million folio is, however, minimal. The valuation reserves for invest- as at 30 September 2015, compared to EUR 7,786.6 million ments shown in the following table indicate the difference as at 31 December 2014. The bulk of the increase was due between fair value and book value of those investments rec- to the weaker euro against our major foreign currencies and ognised under IFRS at book values. Other adjustments encom- the associated higher foreign-currency volumes underlying pass above all the deferred taxes as well as the deduction of the risks, such as the volume of investments or loss reserves. foreseeable dividends as required by Solvency II. The available These increases in volume driven by exchange rate movements economic capital, which is available as liable capital for poli- caused the risk capital to climb in all risk categories. A further cyholders, is composed of the economic equity and the hybrid factor was the diminished diversification effect as a conse- capital. Hybrid capital is recognised at market-consistent value quence of dependencies between, in particular, US-dollar- as required by Solvency II, with changes in own credit risk not dominated risks. The decline in the tax effect resulted from being included in the valuation. the fact that with the currently higher risk capital the loss-min- imising effect of taxes is subject to greater limitations. The available economic capital increased to EUR 12,614.7 million as at 30 September 2015 compared to EUR 12,443.9 mil- The elevated risk in relation to market risks was not only lion as at 31 December 2014. This was due principally to volume-driven but also reflected the building of an equity allo- the good business performance in the first three quarters as cation in the investment portfolio. well as positive effects from the weakening of the euro against our major foreign currencies and from economic adjustments The underwriting risks in property and casualty reinsurance for underwriting reserves. The value adjustments increased increased primarily on account of the larger volume of reserves primarily as a consequence of the good development of new and the higher catastrophe risks, which could be attributed business in life and health reinsurance and due to a more above all to the stronger US dollar. The increase in the under- favourable assessment of future cash flows in property and writing risks in life and health reinsurance was driven not only casualty reinsurance. This is opposed by a decrease in the by exchange rate movements but also by larger business vol- available capital from subordinated bonds owing to redemp- umes in the area of longevity risks. tion of a hybrid bond. Counterparty default risks increased principally as a result of a larger volume of cash and short-term deposits. Operational risks developed in step with the underlying business volumes.

80 Hannover Re | Annual Report 2015 The internal capital model is based on current methods from When it comes to aggregating the individual risks, we make actuarial science and financial mathematics. In the case of allowance for dependencies between risk factors. Dependen- underwriting risks, we are able to draw on a rich internal data cies arise, for example, as a consequence of market shocks, history to estimate the probability distributions, e. g. for the such as the financial crisis, which simultaneously impact mul- reserve risk. For risks from natural perils we use external mod- tiple market segments. What is more, several observation peri- els, which are adjusted in the context of a detailed internal ods may be interrelated on account of market phenomena such review process such that they reflect our risk profile as closely as price cycles. In dealing with these dependencies, however, as possible. In the area of life and health reinsurance long-term it is our assumption that not all extreme events occur at the payment flows are modelled under various scenarios. With same time. The absence of complete dependency is referred respect to all the aforementioned risks we use internal data to as diversification. Hannover Re’s business model is based to define scenarios and probability distributions. The inter- inter alia on building up the most balanced possible portfolio nal data is enhanced by way of parameters set by our internal so as to achieve the greatest possible diversification effects experts. These parameters are especially significant in relation and in order to deploy capital efficiently. Diversification exists to extreme events that have not previously been observed. between individual reinsurance treaties, lines, business segments and risks. We define the cost of capital to be generated per business unit according to the capital required by our business segments and lines and based on their contribution to Combined management report diversification.

Required risk capital M 51

30.9.2015 31.12.2014 Confidence level Confidence level Confidence level Confidence level in EUR million 99.97% 99.5% 99.97% 99.5% Underwriting risk in property and casualty reinsurance 5,377.3 3,408.9 5,023.1 3,101.1 Underwriting risk in life and health reinsurance 3,441.9 2,109.6 3,327.2 1,906.9 Market risk 5,527.9 3,903.1 5,141.9 3,521.6 Counterparty default risk 881.0 279.9 756.3 254.7 Operational risk 684.8 431.1 595.4 382.7 Diversification (5,070.0) (3,329.5) (5,687.1) (3,299.6) Tax effects (1,249.9) (1,676.8) (1,370.2) (1,514.3) Required risk capital of the Hannover Re Group 9,593.0 5,126.3 7,786.6 4,353.1

Hannover Re | Annual Report 2015 81 Risk landscape of Hannover Re The risk landscape of Hannover Re encompasses:

In the context of its business operations the Hannover Re • underwriting risks in property & casualty and Group enters into a broad variety of risks. These risks are delib- life & health reinsurance which originate from our busi- erately accepted, steered and monitored in order to be able to ness activities and manifest themselves inter alia in act on the associated opportunities. The parameters and deci- fluctuations in loss estimates as well as in unexpected sions of the Executive Board with respect to the risk appetite catastrophes and changes in biometric factors such as of the Hannover Re Group, which are based on the calculations mortality, of risk-bearing capacity, are fundamental to the acceptance • market risks which arise in connection with our invest- of risks. Through our business operations on all continents ments and also as a consequence of the valuation of and the diversification between our Property & Casualty and sometimes long-term payment obligations associated Life & Health reinsurance business groups we are able to effec- with the technical account, tively allocate our capital in light of opportunity and risk consid- • counterparty default risks resulting from our diverse erations and generate a higher-than-average return on equity. business relationships and payment obligations inter Along with our principal business operations as a reinsurer of alia with clients and retrocessionaires, property & casualty and life & health business, we also transact • operational risks which may derive, for example, from primary insurance in selected niche markets as a complement deficient processes or systems and to our core reinsurance business. With this approach we are • other risks, such as reputational and liquidity risks. well positioned for further profitable growth. In this context crucial importance attaches to our risk management in order to ensure that, among other things, risks to the reinsurance portfolio remain calculable and also exceptional major losses do not have an unduly adverse impact on the result.

Risk landscape of Hannover Re M 52

Price / premium risk Longevity and Catastrophe risk Property and casualty reinsurance Life and health reinsurance mortality risk Reserving risk Morbidity and disability risk Lapse risk Underwriting risks Catastrophe risk

Share price risk Risk landscape of Counterparty default risks Market risks Interest rate risk Hannover Re Real estate risk Currency risk Credit and spread risk Reputational risk People Strategic risk Other risks Operational risks Systems Liquidity risk Processes Emerging risks External events

At the present time our most significant risks are the credit portfolios are impacted by improvements in mortality while and spread risks within the market risks, the reserving and death benefit portfolios are adversely affected by deteriorations catastrophe risks within the underwriting risks of property in mortality. The specific risk characteristics and the princi- and casualty reinsurance and the risk of changes in mortality pal monitoring and steering mechanisms are described in the within the underwriting risks of life and health reinsurance. following sections. With regard to mortality risks, as a general principle annuity

82 Hannover Re | Annual Report 2015 Underwriting risks in property and The largest share of the required risk capital for the premium casualty reinsurance risk (incl. catastrophe risk) is attributable to risks from natural disasters. The following table shows the required risk capital Risk management in property and casualty reinsurance has for our four largest natural hazards scenarios: defined various overall guidelines for efficient risk steering. These include, among other things, the limited use of retro- Required risk capital 1 for the four largest M 54 cessions to reduce volatility and conserve capital. It is also natural hazards scenarios crucially important to consistently maximise the available risk in EUR million 2015 capacities on the basis of the risk management parameters of the Hannover Re Group and to steer the acceptance of risks sys- Hurricane US / Caribbean 1,338.0 tematically through the existing central and local underwriting Earthquake US West Coast 1,103.9 guidelines. Our conservative reserving level is a crucial factor Winter storm Europe 828.6 in our risk management. We make a fundamental distinction Earthquake Japan 780.0 between risks that result from business operations of past years (reserve risk) and those stemming from activities in the current 1 Required risk capital with a confidence level of 99.5% on an or future years (price / premium risk). In the latter case, special aggregate annual loss basis importance attaches to the catastrophe risk. Combined management report The reserve risk, i. e. the risk of under-reserving losses and the Diversification within the Property & Casualty reinsurance busi- resulting strain on the underwriting result, is the overriding pri- ness group is actively managed through allocation of the cost ority in our risk management. We attach the utmost importance of capital according to the contribution made to diversification. to a conservative reserving level and therefore traditionally A high diversification effect arises out of the underwriting of have a high confidence level (> 50%). In order to counter the business in different lines and different regions with different risk of under-reserving we calculate our loss reserves based on business partners. In addition, the active limitation of individual our own actuarial estimations and establish, where necessary, risks – such as natural catastrophes – enhances the diversifi- additional reserves supplementary to those posted by our ced- cation effect. The risk capital with a confidence level of 99.5% ants as well as the segment reserve for losses that have already for underwriting risks in property and casualty reinsurance occurred but have not yet been reported to us. Liability claims breaks down as follows: have a major influence on the segment reserve. The segment reserve is calculated on a differentiated basis according to risk Required risk capital 1 for underwriting risks M 53 categories and regions. The segment reserve established by in property and casualty reinsurance the Hannover Re Group amounted to EUR 6,948.1 million in the year under review. in EUR million 30.9.2015 31.12.2014

Premium risk The statistical run-off triangles are another monitoring tool (incl. catastrophe risk) 2,237.4 2,079.4 used by our company. They show the changes in the reserve Reserve risk 2,292.5 1,907.0 over time as a consequence of paid claims and in the recalcu- Diversification (1,121.0) (885.3) lation of the reserves to be established as at each balance sheet Underwriting risk in property date. Their adequacy is monitored using actuarial methods. and casualty reinsurance 3,408.9 3,101.1

Our own actuarial calculations regarding the adequacy of the 1 Required risk capital with a confidence level of 99.5% reserves are also subject to annual quality assurance reviews conducted by external firms of actuaries and auditors. For further remarks on the reserve risk please see our comments in the section “Technical provisions” on page 198 et seq.

In the case of asbestos- and pollution-related claims it is difficult to reliably estimate future loss payments. The adequacy of these reserves can be estimated using the so-called “survival ratio”. This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue.

Hannover Re | Annual Report 2015 83 Survival ratio in years and reserves for asbestos-related claims and pollution damage M 55

in EUR million 2015 2014 Individual loss IBNR Survival ratio Individual loss IBNR Survival ratio reserves reserves in years reserves reserves in years Asbestos-related claims / pollution damage 36.0 203.3 26.9 33.8 189.3 28.2

In order to partially hedge inflation risks Hannover Re holds Within the scope of this process, the Executive Board defines inflation-linked instruments in its portfolio that protect parts of the risk appetite for natural perils once a year on the basis of the loss reserves against inflation risks. An inflation risk exists the risk strategy by specifying the portion of the economic cap- particularly inasmuch as the liabilities (e. g. loss reserves) could ital that is available to cover risks from natural perils. This is develop differently than assumed at the time when the reserve a key basis for our underwriting approach in this segment. As was constituted because of inflation. This inflation protection part of our holistic approach to risk management across busi- was initially ensured by way of inflation swaps, which were ness groups, we take into account numerous relevant scenar- purchased for the first time in 2010; it was increased in 2011. ios and extreme scenarios, determine their effect on portfolio Since 2012 we have also increasingly obtained parts of the and performance data, evaluate them in relation to the planned inflation protection for our loss reserves by purchasing bonds figures and identify alternative courses of action. with inflation-linked coupons and redemption amounts. In the course of the year under review the inflation protection was For the purposes of risk limitation, maximum amounts are also converted to the exclusive use of such bonds. stipulated for various extreme loss scenarios and return periods in light of profitability criteria. Risk management ensures Licensed scientific simulation models, supplemented by the adherence to these maximum amounts. The Executive Board, expertise of our own specialist departments, are used to assess Risk Committee and P&C Executive Committee are kept regu- our material catastrophe risks from natural hazards (especially larly updated on the degree of capacity utilisation. The limits earthquake, windstorm and flood). Furthermore, we establish and thresholds for the 200-year aggregate loss as well as the the risk to our portfolio from various scenarios in the form of utilisation thereof are set out in the following table: probability distributions. The monitoring of the risks resulting from natural hazards is rounded out by realistic extreme Limit and threshold for the 200-year aggregate M 57 loss scenarios. annual loss as well as utilisation thereof

Limit Threshold Actual Stress tests for natural catastrophes after retrocessions M 56 2015 2015 utilisation in EUR million (July 2015) Maximum annual loss, 2015 2014 in EUR million All natural catastrophe risks 1 Effect on forecast net income 200-year aggregate annual loss 1,778 1,600 1,481 Windstorm Europe 100-year loss (123.5) (251.0) 1 Loss relative to the underwriting result 250-year loss (281.2) (440.0) Windstorm United States 100-year loss (733.7) (541.7) 250-year loss (1,031.7) (778.1) Windstorm Japan 100-year loss (153.6) (172.2) 250-year loss (199.4) (250.1) Earthquake Japan 100-year loss (200.6) (254.3) 250-year loss (477.8) (520.8) Earthquake California 100-year loss (349.6) (303.5) 250-year loss (746.1) (503.1) Earthquake Australia 100-year loss (136.8) (172.7) 250-year loss (378.8) (449.7)

84 Hannover Re | Annual Report 2015 Net expenditure on major losses in the year under review amounted to EUR 572.9 million (EUR 425.7 million). Our company incurred the following catastrophe losses and major claims in the 2015 financial year:

Catastrophe losses and major claims 1 in 2015 M 58

in EUR million Date gross net 4 marine claims 146.7 83.8 Explosions at the Port of Tianjin, China 129.2 111.1 7 property claims 105.7 105.7 5 aviation claims 71.3 51.3 Flooding, United Kingdom 5 – 26 December 2015 37.9 28.3 Storm “Etau”, Japan 7 – 9 September 2015 27.3 27.3 Storm “Niklas”, Germany, Switzerland, Austria 31 March – 1 April 2015 26.7 21.0 Storm, Australia 19 – 25 April 2015 26.7 17.0

Earthquake, Chile 16 September 2015 25.5 25.5 Combined management report 1 credit claim 20.0 20.0 Flooding, India 16 November – 4 December 2015 18.8 18.8 Winter storm, United States 1 – 22 February 2015 18.6 12.8 Typhoon “Mujigae”, Taiwan, Korea, China 2 – 3 October 2015 14.1 14.1 Storm “Erika”, Caribbean 25 – 31 August 2015 12.7 12.7 Forest fires, United States 12 September 2015 12.4 9.3 Severe weather / flooding, United States 24 May – 14 June 2015 10.8 7.3 Storm, Northern Europe 8 – 11 January 2015 10.0 6.9 Total 714.4 572.9

1 Natural catastrophes and other major claims in excess of EUR 10 million gross

The price / premium risk lies primarily in the possibility of a Ensuring the quality of our portfolios M 59 random claims realisation that diverges from the claims expectancy on which the premium calculation was based. Regular and independent reviews of the models used for treaty quota- Calculation of the loss expectancy tion as well as central and local underwriting guidelines are • Historical loss and exposure analysis vital management components. We have put in place a mul- • Future inflation • Changes in the quality of underlying risks ti-step quotation process to ensure the quality of our portfolios: Step 1 • Changes in the quantity of underlying risks • Discounting of future cash flows

Cost estimation • Commissions • Broker fees Step 2 • Internal administration

Calculation of the cost of capital • Level of capital allocation determined by volatility of the business covered and contribution to diversification Step 3 • Expected return on equity • Capital structure

Hannover Re | Annual Report 2015 85 In addition, Hannover Re’s regional and treaty departments prepare regular reports on the progress of their respective renewals. The reporting in this regard makes reference inter alia to significant changes in conditions, risks (such as inadequate premiums) as well as to emerging market opportunities and the strategy pursued in order to accomplish targets. The development of the combined ratio in property and casualty reinsurance in 2015 and prior years is shown in the table below:

Combined and catastrophe loss ratio M 60

in % 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 Combined ratio (property and casualty reinsurance) 94.4 94.7 94.9 95.8 104.3 98.2 96.6 95.4 99.7 100.8 Thereof catastrophe losses 1 7.1 6.1 8.4 7.0 16.5 12.3 4.6 10.7 6.3 2.3

1 Net share of the Hannover Re Group for natural catastrophes and other major claims in excess of EUR 10 million gross as a percentage of net premium earned (until 31 December 2011: in excess of EUR 5 million gross)

For further information on the run-off of the loss reserves in view of the fact that the contracts are normally taken out please see our explanatory remarks in the section “Run-off of for different regions, age groups and individuals. The required the net loss reserve in the property and casualty reinsurance risk capital with a confidence level of 99.5% for underwriting segment” on page 199 et seq. risks in life and health reinsurance breaks down as follows:

Required risk capital 1 for underwriting risks M 61 Underwriting risks in life and health in life and health reinsurance reinsurance in EUR million 30.9.2015 31.12.2014

All risks directly connected with the life of an insured person Mortality risk 1,617.4 1,448.0 are referred to as biometric risks. They include in particular Longevity risk 1,314.8 1,121.2 the miscalculation of mortality, life expectancy, morbidity and Morbidity and disability risk 371.3 351.0 occupational disability. Biometric risks are the material risks Lapse risk 646.6 736.4 for our company in the area of life and health reinsurance. Our Diversification (1,840.5) (1,749.7) goal is to strike a balance between biometric risks. Further- Underwriting risk more, we are exposed to lapse risks because the cash flows life and health 2,109.6 1,906.9 resulting from our reinsurance treaties are in part dependent on lapse rates among policyholders. Counterparty default risks 1 Required risk capital with a confidence level of 99.5% are also material since we additionally prefinance our cedants’ new business acquisition costs. Furthermore, we are exposed Diversification is a central management tool for our company. to catastrophe risks, especially events involving a high number We seek to spread risks as far as possible across different risk of fatalities in our insurance portfolio. classes and different regions. In our pricing of reinsurance treaties we provide incentives to further increase diversification. The reserves are determined on the basis of secure biometric actuarial bases in light of the information provided by our cli- Through our quality assurance measures we ensure that the ents. The biometric actuarial bases used and the lapse assump- reserves established by ceding companies in accordance with tions are continuously reviewed with an eye to their adequacy local accounting principles satisfy all requirements with respect and if necessary adjusted. This is done using the company’s to the calculation methods used and assumptions made (e. g. own empirical data as well as market-specific insights. Our use of mortality and morbidity tables, assumptions regarding current risk profile in life and health reinsurance is dominated the lapse rate). New business is written in all regions in com- by mortality and longevity risks. This is due to the fact that pliance with underwriting guidelines applicable worldwide, under some of our contracts we pay death benefits, while under which set out detailed rules governing the type, quality, level others we pay survival benefits. The volume of our annuity port- and origin of risks and how these considerations are factored folio has continued to grow and contributes to diversification into the pricing. These global guidelines are revised annually within life and health reinsurance. We calculate the diversifi- and approved by the Executive Board. Special underwriting cation effect between mortality and longevity risks prudently guidelines give due consideration to the particular features

86 Hannover Re | Annual Report 2015 of individual markets. By monitoring compliance with these Required risk capital 1 for market risks M 62 underwriting guidelines we minimise the risk of an inability to pay or of deterioration in the financial status of cedants. Reg- in EUR million 30.9.2015 31.12.2014 ular reviews and holistic analyses (e. g. with an eye to lapse Credit and spread risk 2,777.4 2,639.0 risks) are carried out with respect to new business activities Interest rate risk 761.9 851.9 and the assumption of international portfolios. The actuarial Foreign exchange risk 874.7 930.6 reports and documentation required by local regulators ensure Equity risk 2 1,109.5 804.3 that regular scrutiny also takes place on the level of the sub- Real estate risk 436.9 404.4 sidiaries. The interest rate risk, which in the primary sector Diversfication (2,057.3) (2,108.6) is important in life business owing to the guarantees that are given, is of only minimal relevance to our company thanks to Market risk 3,903.1 3,521.6 the design of our reinsurance treaties. We have confidence 1 in the entrepreneurial abilities of our underwriters and grant Required risk capital with a confidence level of 99.5% 2 Including private equity them the most extensive possible powers. In our decentralised organisation we manage risks where they arise using a consistent Group-wide approach in order to obtain an overall view With a view to preserving the value of our assets under own of the risks in life and health reinsurance. Our global under- management, we constantly monitor adherence to a trigger Combined management report writing guidelines provide underwriters with an appropriate mechanism based on a clearly defined traffic light system framework for this purpose. The risks arising out of life and that is applied across all portfolios. This system defines clear health reinsurance are reflected in the internal capital model. thresholds and escalation channels for the cumulative fluctuations in fair value and realised gains / losses on investments since the beginning of the year. These are unambiguously Market risks defined in conformity with our risk appetite and trigger specified information and escalation channels if a corresponding Faced with a challenging capital market climate, particularly fair value development is overstepped. high importance attaches to preserving the value of assets under own management and the stability of the return. Han- Interest rate and spread markets, in particular, saw very mixed nover Re’s portfolio is therefore guided by the principles of a movements across the most important investment currencies balanced risk / return profile and broad diversification. Based over the course of the period under review. In this context on a risk-averse asset mix, the investments reflect both the the escalation levels of the trigger system were reached on currencies and durations of our liabilities. Market price risks occasion during the year (cf. chart on page 88). Key factors in include equity risks, interest rate risks, currency risks, real this development were increases in the general level of inter- estate risks, spread risks and credit risks. Our portfolio cur- est rates, especially in USD and GBP, as well as the general rently consists in large part of fixed-income securities, and increase in credit spreads. Even our conservatively oriented hence credit and spread risks account for the bulk of the mar- and broadly diversified investment portfolio was unable to ket risk. We minimise interest rate and currency risks through divorce itself from the resulting declines in fair value. Specif- the greatest possible matching of payments from fixed-income ically, our portfolio of fixed-income bonds gave back some of securities with the projected future payment obligations from the fair value gains recorded in previous years, in part owing our insurance contracts. Market risks derive from the invest- to yield increases but also entirely normally due to the passage ments managed by Hannover Re itself and from investment of time. Fair value changes from investments in equities and risks of ceding companies that we assume in connection with private equity as well as the renewed drop in interest rates in insurance contracts. The following table shows the risk capi- the EUR portfolio were positive factors here. tal with a confidence level of 99.5% for the market risks from investments under own and third-party management. The predefined discussion and analysis mechanisms initiated on reaching the escalation levels in each case arrived at the assessment that the general market movements would not have any intolerable or strategy-changing implications for our portfolio or our capitalisation. Consequently, we did not make any changes to the investment allocation as a result of our trigger system.

Hannover Re | Annual Report 2015 87 Utilisation of the trigger system M 63 in %

1,6160 1,4140 1,2120 1,0100 0,8 80 0,6 60 40 0,4 Q1 2015 Q2 2015 Q3 2015 Q4 2015

Utilisation by Hannover Re Warning level 1 Warning level 2 Warning level 3

The short-term loss probability measured as the “Value at Risk” are mapped on the level of individual positions within the mul- (VaR) is another vital tool used for monitoring and managing ti-factor model; residual risks (e. g. market price risks that are market price risks. It is calculated on the basis of historical not directly explained by the multi-factor model) can be deter- data, e. g. the volatility of the securities positions under own mined through back-calculation and are incorporated into the management and the correlation between these risks. As part overall calculation. The model takes into account interest rate of these calculations the decline in the fair value of our port- risks, credit and spread risks, systematic and specific equity folio is simulated with a certain probability and within a cer- risks, commodity risks and option-specific risks. Against the tain period. The VaR of the Hannover Re Group determined in backdrop of what was still a difficult capital market environ- accordance with these principles specifies the decrease in the ment, the volatilities of fixed-income assets, in particular, and fair value of our securities portfolio under own management hence the market price risks increased in the year under review that with a probability of 95% will not be exceeded within relative to the previous year. Based on continued broad risk ten trading days. A multi-factor model is used to calculate the diversification and the orientation of our investment portfolio, VaR indicators for the Hannover Re Group. It is based on time our Value at Risk was nevertheless clearly below the Value series of selected representative market parameters (equity at Risk upper limit defined in our investment guidelines. It prices, yield curves, spread curves, exchange rates, commod- amounted to 1.0% (0.8%) as at the end of the reporting period. ity prices and macro-economic variables). All asset positions

Value at Risk 1 for the investment portfolio of the Hannover Re Group M 64 in %

1,51.5

1,21.2

0,90.9

0,60.6 Q1 2015 Q2 2015 Q3 2015 Q4 2015

1 VaR upper limit according to Hannover Re’s investment guidelines: 2.5%

88 Hannover Re | Annual Report 2015 Stress tests are conducted in order to be able to map extreme scenarios as well as normal market scenarios for the purpose of calculating the Value at Risk. In this context, the loss potentials for fair values and shareholders’ equity (before tax) are simulated on the basis of already occurred or notional extreme events.

Scenarios for changes in the fair value of material asset classes M 65

Scenario Portfolio change on Change in equity in EUR million a fair value basis before tax Equity securities and private Share prices -10% -123.4 -123.4 equity Share prices -20% -246.7 -246.7 Share prices +10% +123.4 +123.4 Share prices +20% +246.7 +246.7

Fixed-income securities Yield increase +50 basis points -770,1 -673,8

Yield increase +100 basis points -1.506,3 -1.317,9 Combined management report Yield decrease -50 basis points +793,3 +692,4 Yield decrease -100 basis points +1.618,4 +1.411,9

Real estate Real estate market values -10% -175.8 -93.2 Real estate market values +10% +175.8 +38.4

Further significant risk management tools – along with the with the same maturity. Changes in these risk premiums, which various stress tests used to estimate the loss potential under are observable on the market, result – analogously to changes extreme market conditions – include sensitivity and duration in pure market yields – in changes in the fair values of the cor- analyses and our asset / liability management (ALM). The inter- responding securities. nal capital model provides us with quantitative support for the investment strategy as well as a broad diversity of VaR Currency risks are especially relevant if there is a currency calculations. In addition, tactical duration ranges are in place, imbalance between the technical liabilities and the assets. within which the portfolio can be positioned opportunistically Through extensive matching of currency distributions on the according to market expectations. The parameters for these assets and liabilities side, we reduce this risk on the basis ranges are directly linked to our calculated risk-bearing capac- of the individual balance sheets within the Group. The short- ity. Further information on the risk concentrations of our invest- term Value at Risk therefore does not include quantification ments can be obtained from the tables on the rating structure of the currency risk. We regularly compare the liabilities per of fixed-income securities as well as on the currencies in which currency with the covering assets and optimise the currency investments are held. Please see our comments in Section 6.1 coverage by regrouping assets. In so doing, we make allowance of the notes entitled “Investments under own management” for collateral conditions such as different accounting require- on page 176 et seq. ments. Remaining currency surpluses are systematically quan- tified and monitored within the scope of economic modelling. Share price risks derive from the possibility of unfavourable A detailed presentation of the currency spread of our invest- changes in the value of equities, equity derivatives or equity ments is provided in Section 6.1 of the notes entitled “Invest- index derivatives in our portfolio. In addition to such assets ments under own management” on page 184 et seq. held to date on only a very modest scale as part of strategic participations, we acted on market opportunities in the course Real estate risks result from the possibility of unfavourable of the year to rebuild a broadly diversified equity portfolio. changes in the value of real estate held either directly or Please see our comments in Section 6.1 of the notes entitled through fund units. They may be caused by a deterioration in “Investments under own management” on page 176 et seq. particular qualities of a property or by a general downslide in market values. Real estate risks continued to grow in impor- The portfolio of fixed-income securities is exposed to the tance for our portfolio owing to our ongoing involvement in interest rate risk. Declining market yields lead to increases this sector. We spread these risks through broadly diversified and rising market yields to decreases in the fair value of the investments in high-quality markets of Germany, Europe as fixed-income securities portfolio. The credit spread risk should a whole and the United States; each investment is preceded also be mentioned. The credit spread refers to the interest rate by detailed analyses of the property, manager and market differential between a risk-entailing bond and risk-free bond concerned.

Hannover Re | Annual Report 2015 89 We use derivative financial instruments only to the extent part collateralised on a daily basis so as to avoid credit risks needed to hedge risks. The primary purpose of such financial associated with the use of such transactions. The remaining instruments is to hedge against potentially adverse develop- exposures are controlled according to the restrictive parame- ments on capital markets. At the start of the year under review ters set out in the investment guidelines. Our investments entail we had still held inflation swaps to hedge part of the infla- credit risks that arise out of the risk of a failure to pay (inter- tion risks associated with the loss reserves in our technical est and / or capital repayment) or a change in the credit status account. Some of these inflation swaps reached their maturity (rating downgrade) of issuers of securities. We attach equally date during the year and were not renewed. The remaining vital importance to exceptionally broad diversification as we instruments were terminated, as a result of which our inflation do to credit assessment conducted on the basis of the qual- protection is now ensured exclusively by means of bonds with ity criteria set out in the investment guidelines. We measure inflation-linked coupons and redemption amounts. In addition, credit risks in the first place using the standard market credit as in the previous year, a portion of our cash flows from the risk components, especially the probability of default and the insurance business as well as currency risks was hedged using potential amount of loss – making allowance for any collateral forward exchange transactions because currency matching and the ranking of the individual instruments depending on could not be efficiently achieved. Hannover Re holds further their effect in each case. derivative financial instruments to hedge interest rate risks from loans taken out to finance real estate. In addition, Han- We then assess the credit risk first on the level of individual nover Re has taken out hedges in the form of equity swaps to securities (issues) and in subsequent steps on a combined basis hedge price risks in connection with the stock appreciation on the issuer level. In order to limit the risk of counterparty rights granted in the first quarter of 2014 under the Share default we set various limits on the issuer and issue level as Award Plan. These are intended to neutralise changes in the well as in the form of dedicated rating quotas. A comprehen- fair values of the awarded stock appreciation rights. Contracts sive system of risk reporting ensures timely reporting to the are concluded with reliable counterparties and for the most functions entrusted with risk management.

Rating structure of our fixed-income securities 1 M 66

Rating classes Government bonds Securities issued Corporate bonds Covered bonds / by semi-governmental asset-backed securities entities 2 in % in EUR in % in EUR in % in EUR in % in EUR million million million million AAA 74.0 7,681.5 64.4 4,167.6 1.6 202.0 67.7 2,683.3 AA 12.9 1,335.5 30.9 2,000.5 14.9 1,910.8 13.3 525.5 A 7.7 800.0 2.8 181.2 39.1 4,997.2 7.9 314.3 BBB 4.5 467.5 1.3 84.0 36.9 4,714.6 6.7 265.6 < BBB 0.9 90.2 0.6 41.7 7.5 964.5 4.4 175.5 Total 100.0 10,374.8 100.0 6,475.0 100.0 12,789.0 100.0 3,964.2

1 Securities held through investment funds are recognised pro rata with their corresponding individual ratings. 2 Including government-guaranteed corporate bonds

90 Hannover Re | Annual Report 2015 The measurement and monitoring mechanisms that have been which entail a risk inter alia through the potential loss of the put in place safeguard a prudent, broadly diversified invest- premium paid by the cedant to the broker. We minimise these ment strategy. risks, among other things, by reviewing all broker relationships once a year with an eye to criteria such as the existence On a fair value basis EUR 4,127.7 million of the corporate of professional indemnity insurance, payment performance bonds held by our company were issued by entities in the finan- and proper contract implementation. The credit status of ret- cial sector. Of this amount, EUR 3,392.1 million was attribut- rocessionaires is continuously monitored. On the basis of this able to banks. The vast majority of these bank bonds (76.4%) ongoing monitoring a Security Committee decides on meas- are rated “A” or better. Our investment portfolio under own ures where necessary to secure receivables that appear to be management does not contain any written or issued credit at risk of default. This process is supported by a Web-based default swaps. risk management application, which specifies cession limits for the individual retrocessionaires participating in protection cover programmes and determines the capacities still available Counterparty default risks for short-, medium- and long-term business. Depending on the type and expected run-off duration of the reinsured business, The counterparty default risk consists primarily of the risk of the selection of reinsurers takes into account not only the mini- complete or partial failure of the counterparty and the associ- mum ratings of the rating agencies Standard & Poor’s and A.M. Combined management report ated default on payment. The required risk capital for counter- Best but also internal and external expert assessments (e. g. party defaults with the confidence level of 99.5% amounted to market information from brokers). Overall, retrocessions con- EUR 279.9 million as at 30 September 2015. serve our capital, stabilise and optimise our results and enable us to act on opportunities across a broader front, e. g. following Since the business that we accept is not always fully retained, a major loss event. Regular visits to our retrocessionaires give but instead portions are retroceded as necessary, the credit risk us a reliable overview of the market and put us in a position to is also material for our company in reinsurance transactions. respond quickly to capacity changes. The following table shows Our retrocession partners are carefully selected and monitored how the proportion of assumed risks that we do not retrocede in light of credit considerations in order to keep the risk as (i. e. that we run in our retention) has changed in recent years: small as possible. This is also true of our broker relationships,

Gross written premium retained M 67

in % 2015 2014 2013 2012 2011 Hannover Re Group 87.0 87.6 89.0 89.8 91.2 Property and casualty reinsurance 89.3 90.6 89.9 90.2 91.3 Life and health reinsurance 84.2 83.9 87.7 89.3 91.0

Hannover Re | Annual Report 2015 91 Alongside traditional retrocessions in property and casualty Reinsurance recoverables as at the balance sheet date M 68 reinsurance we also transfer risks to the capital market. in EUR million

Counterparty default risks are also relevant to our investments 2,0002000 and in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our clients, retroces- 1,551 sionaires and broker relationships as well as our investments 1,538 1,500 98 1,404 are therefore carefully evaluated and limited in light of credit 1500 117 1,376 1,395 84 101 95 considerations and are constantly monitored and controlled 332 313 277 within the scope of our system of limits and thresholds. 264 348 1,0001000 The key ratios for managing the counterparty default risk are 519 440 379 459 371 as follows: 22 0 1 0 0 500500 • 88.5% of our retrocessionaires have an investment grade 647 664 rating (“AAA” to “BBB”). 601 553 581 • 88.3% are rated “A” or better. 41.7% of our recoverables from reinsurance business are 00 • 2011 2012 2013 2014 2015 secured by deposits or letters of credit. What is more, for the majority of our retrocessionaires we also function as Secured AAA AA A ≤ BBB, NR reinsurer, meaning that in most cases recoverables can potentially be set off against our own liabilities. • In terms of the Hannover Re Group’s major companies, Further remarks on technical and other assets which were unad- EUR 236.4 million (6.4%) of our accounts receivable from justed but considered overdue as at the balance sheet date as reinsurance business totalling EUR 3,665.9 million were well as on significant impairments in the year under review are older than 90 days as at the balance sheet date. provided in Section 6.4 “Technical assets” on page 192 et seq., • The average default rate over the past four years was 0.4%. Section 6.6 “Other assets” on page 195 et seq. and Section 7.2 “Investment result” on page 215 et seq. Retrocession gives rise to claims that we hold against our retrocessionaires. These reinsurance recoverables – i. e. the reinsurance recoverables on unpaid claims – amounted to EUR 1,395.3 million (EUR 1,376.4 million) as at the balance sheet date.

The following chart shows the development of our reinsurance recoverables – split by rating quality – due from our retrocessionaires.

92 Hannover Re | Annual Report 2015 Operational risks is a highly critical success factor in this regard, especially in risk management, because – among other things – the validity Operational risks refer to the risk of losses occurring because of the results delivered by the internal model depends primar- of the inadequacy or failure of internal processes or as a result ily on the data provided. of events triggered by employee-related, system-induced or external factors. In contrast to underwriting risks (e. g. the Compliance risks are associated with the risk of breaches of reserve risk), which we enter into in a deliberate and con- standards and requirements, non-compliance with which may trolled manner in the context of our business activities, oper- entail lawsuits or official proceedings with not inconsidera- ational risks are an indivisible part of our business activities. ble detrimental implications for the business activities of the The focus is therefore on risk avoidance and risk minimisation. Hannover Re Group. Regulatory compliance, compliance with As a derivation from our strategic principle “We manage risks the company’s Code of Conduct, data privacy and compliance actively”, we act according to the following principles in rela- with anti-trust and competition laws have been defined as tion to operational risks: issues of particular relevance to compliance. The compliance risk also extends to tax and legal risks. Responsibilities within 1. We integrate operational risk management into the the compliance organisation are regulated and documented company and its culture. Group-wide and interfaces with risk management have been 2. We manage operational risks proactively and put in place. The set of tools is rounded off with regular compli- Combined management report sustainably. ance training programmes. For further information on compli- 3. We consider events and scenarios that cover the entire ance-related topics, including for example lawsuits, contingent spectrum of operational risks. liabilities and commitments, please see Section 8.6 “Lawsuits” 4. We strive for appropriate risk reduction through our and Section 8.7 “Contingent liabilities and commitments” on measures. page 232 et seq. 5. We manage within defined limits and create transparency through measurements. In selected market niches we transact primary insurance business that complements our reinsurance activities. In so doing, With the aid of the Self-Assessment for Operational Risks we just as on the reinsurance side, we always work together with determine the maturity level of our operational risk manage- partners from the primary sector – such as insurance brokers ment system and define action fields for improvements. The and underwriting agencies. This gives rise to risks associ- assessment is carried out, for example, by assessing the matu- ated with such sales channels, although these are minimised rity level of the respective risk management function or of the through the careful selection of agencies, mandatory under- risk monitoring and reporting. The system enables us, among writing guidelines and regular checks. other things, to prioritise operational risks and is used (for internal purposes) to calculate the capital commitment in our Risks associated with the outsourcing of functions can result internal model. from such outsourcing of functions, services and / or organisational units to third parties outside Hannover Re. Mandatory Required risk capital 1 for operational risks M 69 rules have been put in place to limit this risk; among other things, they stipulate that a risk analysis is to be performed in EUR million 30.9.2015 31.12.2014 prior to a material outsourcing. In the context of this analysis a Operational risk 431.1 382.7 check is carried out to determine, inter alia, what specific risks exist and whether outsourcing can even occur in the first place. 1 Required risk capital at a confidence level of 99.5% The proper functioning and competitiveness of the Hannover Within the overall framework of operational risks we consider, Re Group can be attributed in large measure to the expertise in particular, business process risks, compliance risks, risks and dedication of our staff. In order to minimise personnel associated with sales channels and outsourcing of functions, risks, we pay special attention to the skills, experience and fraud risks, personnel risks, information technology risks / infor- motivation of our employees and foster these qualities through mation security risks and business interruption risks. outstanding personnel development and leadership activities. Regular employee surveys and the monitoring of turnover rates Business process risks are associated with the risk of deficient ensure that such risks are identified at an early stage and scope or flawed internal processes, which can arise as a consequence to take the necessary actions is created. of an inadequate process organisation. We have defined criteria to evaluate the maturity level of the material processes, e. g. for Fraud risks refer to the risk of intentional violations of laws the reserving process. This enables us to ensure that process or regulations by members of staff (internal fraud) and / or by risks are monitored. In cooperation with the process partici- externals (external fraud). This risk is reduced by the internal pants, the process owner evaluates the risks of the metaprocess control system as well as by the audits conducted by Group and develops measures for known, existing risks. Data quality Auditing on a Group-wide and line-independent basis.

Hannover Re | Annual Report 2015 93 Information technology risks and information security risks associated with possible climate change are analysed by this arise, inter alia, out of the risk of the inadequate integrity, working group. Global warming would affect not only natural confidentiality or availability of systems and information. By perils, but also human health, the world economy, the agricul- way of example, losses and damage resulting from the unau- tural sector etc. These problematic issues may also have impli- thorised passing on of confidential information, the malicious cations for our treaty portfolio – in the form of not just risks overloading of important IT systems or from computer viruses but also opportunities, e. g. through increased demand for rein- are material to the Hannover Re Group. Given the broad spec- surance products. Further examples of emerging risks include trum of such risks, a diverse range of steering and monitoring nanotechnology, shortage of resources and supply chain risks. measures and organisational standards, including for example the requirement to conclude confidentiality agreements Strategic risks derive from a possible imbalance between the with service providers, have been put in place. In addition, corporate strategy of the Hannover Re Group and the con- our employees are made more conscious of such security stantly changing general business environment. Such an risks through practically oriented tools provided online in the imbalance might be caused, for example, by incorrect stra- intranet, by way of training opportunities and through a staff tegic policy decisions, a failure to consistently implement the information campaign. defined strategies and business plans or an incorrect allocation of resources. We therefore regularly review our corporate When it comes to reducing business interruption risks, the strategy in a multi-step procedure and adjust our processes paramount objective is the quickest possible return to nor- and the resulting guidelines as and when required. We have mal operations after a crisis, for example through implemen- defined performance criteria and indicators for operational tation of existing contingency plans. Guided by internationally implementation of the strategic principles and objectives; these accepted standards, we have defined the key framework con- are authoritative when it comes to determining fulfilment of ditions and – among other measures – we have assembled a the various targets. With the “Strategy Cockpit” the Executive crisis team to serve as a temporary body in the event of an Board and responsible managers have at their disposal a strat- emergency. The system is complemented by regular exercises egy tool that assists them with the planning, elaboration and and tests. A leaflet is available setting out the correct behav- management of strategic objectives and measures and safe- iour in the event of a business interruption; this condenses in guards their overall perspective on the company and its stra- compact form the key information that all employees need to tegic risks. The process for the management of strategic risks know (e. g. information channels in a crisis situation). Regular continues to be assessed annually as part of the monitoring of risk reporting to the Risk Committee and the Executive Board business process risks. In addition, a Group-wide guideline on has also been put in place. the management of strategic risks was drawn up in 2015. Fur- ther details on the topic of strategy are provided in the section entitled “Our strategy” on page 16 et seq. Other risks Reputational risks refer to the risk that the trust put in our Of material importance to our company in the category of other company by clients, shareholders, employees or the public at risks are primarily emerging risks, strategic risks, reputational large may be damaged. This risk has the potential to jeopard- risks and liquidity risks. ise the business foundation of the Hannover Re Group. A good corporate reputation is therefore an indispensable prerequisite The hallmark of emerging risks is that the content of such risks for our core business as a reinsurer. Reputational risks may cannot as yet be reliably assessed – especially on the under- arise out of all business activities conducted by the Hannover writing side with respect to our treaty portfolio. Such risks Re Group. Reputational damage may be caused, inter alia, by evolve gradually from weak signals to unmistakable tenden- a data mishap that becomes public knowledge or financial dif- cies. It is therefore vital to detect these risks at an early stage ficulties on account of an underwriting risk. In addition to the and then determine their relevance. For the purpose of early risk identification methods already described, we use a num- detection we have developed an efficient process that spans ber of different techniques for risk minimisation, such as our divisions and lines of business and we have ensured its link- defined communication channels (e. g. Crisis Communication age to risk management. Operational implementation is han- Guideline), a professional approach to corporate communica- dled by an expert working group assembled specially for this tions, tried and tested processes for specific crisis scenarios task. The analyses performed by this working group are used as well as our established Code of Conduct. A specific Group- Group-wide in order to pinpoint any necessary measures (e. g. wide guideline on the management of reputational risks was the implementation of contractual exclusions or the develop- compiled in the 2015 financial year. ment of new reinsurance products). By way of example, risks

94 Hannover Re | Annual Report 2015 The liquidity risk refers to the risk of being unable to meet our financial obligations when they become due. The liquidity risk Opportunity report consists of the refinancing risk (necessary cash could not be obtained or could only be obtained at increased costs) and the Speed is one of the qualities used to measure a successful market liquidity risk (financial market transactions could only knowledge transfer. Quick solutions and staying one step be completed at a poorer price than expected due to a lack ahead of the competition is the name of the game. Hannover of market liquidity). Core elements of the liquidity manage- Re searches systematically for new business opportunities ment of our investments are, in the first place, management in order to generate sustainable growth and strengthen the of the maturity structure of our investments on the basis of the company’s profitable development. With a view to identifying planned payment profiles arising out of our technical liabilities opportunities and successfully translating ideas into business, and, secondly, regular liquidity planning as well as the asset Hannover Re adopts a number of closely related approaches structure of the investments. Above and beyond the foreseeable in order to achieve holistic opportunity and risk management. payments, unexpected and exceptionally large payments may Of significance here is the interplay without overlaps of the pose a threat to liquidity. In reinsurance business, however, various functions within opportunity and risk management, significant events (major losses) are normally paid out after a which is ensured by defined interfaces. lead time that can be reliably planned. As part of our liquidity management we have nevertheless defined asset holdings Key elements in Hannover Re’s opportunity manage- Combined management report that have proven to be highly liquid – even in times of finan- ment include its various market-specific innovations in the cial stress such as the 2008 financial crisis. Our holdings of Life & Health and Property & Casualty reinsurance business unrestricted German, UK and US government bonds as well as groups (see the Forecast on page 126 et seq.). What is more, cash during the year under review were larger than possible innovative and creative ideas are developed by our employ- disbursements for assumed extreme events, which means that ees. Those that can be successfully translated into additional our liquidity is assured even in the unlikely case of financial profitable premium volume are financially rewarded. Further crises coinciding with an extreme event that needs to be paid elements are the working group on “Emerging Risks and Sci- out quickly. The liquid asset reserve stood at EUR 5.4 billion as entific Affairs” and the “Future Radar” initiative. at the balance sheet date. In addition, we manage the liquidity of the portfolio by checking on each trading day the liquidity Not only that, Hannover Re has set up a stand-alone organisa- of the instruments contained therein. These measures serve tional unit for “Business Opportunity Management” within the to effectively reduce the liquidity risk. Chief Executive Officer’s scope of responsibility. This service unit deals systematically with ideas and business opportunities and it concentrates its activities on generating additional premium volume with profit potential. To this end, promising business opportunities are translated into business models with the support of project teams and tested on the market by the partner b2b Protect. New solutions that meet with a positive response are subsequently launched on the market in cooperation with primary insurance partners. The goal is to generate new business and thereby sustainably promote Hannover Re’s profitable growth. Several of the more than 100 ideas contributed by the global network since the unit was set up have been realised as innovative insurance solutions and successfully handed over to line responsibility; they are now being sold on the market by primary insurers. The following solutions may be cited by way of example:

Weather insurance The goal is to offer a heavily weather-dependent clientele industry-specific solutions to protect against fluctuations in the weather. Particularly strong interest in this product is currently being shown by companies operating in areas such as construction, energy trading, event management, amusement parks and tourism.

Hannover Re | Annual Report 2015 95 Energy Savings Protect (Energie Einspar Protect = EEP) This insurance solution enables providers of energy efficiency Cyber risks Cyber attacks on critical systems are becoming increas- solutions to take out protection in the event that the promised ingly common. They can cause considerable financial energy savings fail to materialise. In this case the company in losses and also damage corporate reputations. Not question receives a compensatory payment from the primary only that, they can severely hamper private and public insurer. For its part, Hannover Re covers the energy saving life, especially if critical infrastructures are impacted – warranties of its primary insurance clients. By building trust, such as the health, transportation / traffic and energy the greater planning reliability created by the product makes sectors. In such instances supply bottlenecks with last- it possible for many activities needed as part of Germany’s ing effects as well as major disruptions to public safety turnaround in energy policy to be undertaken in the first place. may ensue. In a networked world the repercussions of Based on its considerable success, as reflected not only in cyber attacks are intensifying because the volume of the premium generated but also in its singling out for energy data stored around the world is constantly growing – efficiency awards (the enercity-Energie-Effizienzpreis and the and in this context it is not only one’s own technical Energieeffizienzpreis Perpetuum from the German Industry infrastructure that needs to be secured. On the con- Initiative for Energy Efficiency (DENEFF)), this product is now trary, the trend towards cloud computing is increas- available Europe-wide and is being modified for other fields ingly shifting the focus to third-party infrastructures of application. and the associated network connection. As part of our holistic risk and opportunity management activities, Energy Output Performance Protect (EOPP) we are also tackling the question of what new insur- Many companies would like to bring new solutions to market ance products can be developed in order to protect that generate more energy and are more efficient. Given the against the relevant threats. Our presence in this mar- innovative nature of the technology, however, customers often ket thus goes as far back as 2007 and we have already lack confidence in such solutions. By protecting the output per- developed corresponding products. formance of energy-creating or energy-increasing technologies we help to boost customer confidence and enable providers to set themselves apart from other market players. If a business idea is translated into reality and a new reinsurance product results, the normal procedure – provided the The networking of the innovative minds involved gives rise to criteria defined for this purpose by Risk Management are appli- close links with other projects, working groups and bodies, cable – is to work through the so-called new product process. such as with the working group on “Emerging Risks und Sci- This process is supported by Risk Management at Hannover Re. entific Affairs” in regard to emerging risks and opportunities The process is always worked through if a contractual commit- (see page 94 “Other risks”). This working group carries out ment is to be entered into in a form not previously used by Han- qualitative assessments of emerging risks. As a result, however, nover Re or if the exposure substantially exceeds the existing not only are the potential risks analysed but also any available scope of coverage. If this is the case, all material internal and business opportunities. In the year under review, for example, external influencing factors are examined beforehand by Risk issues such as “Global shifts in disease patterns due to climate Management (e. g. implications for the overall risk profile or the change”, “Supply chain risks”, “Safe foods and their availa- risk strategy) and an assessment is made. Risk Management bility”, “Costs of preventive medical screening in the United ensures that before it can be used or sold a new reinsurance States”, “Drones”, “Claims resulting from traumatic sports inju- product must be approved by the Executive Board. ries” and “Cyber risks” were explored by the working group.

96 Hannover Re | Annual Report 2015 Opportunity management process M 70 Overall assessment by the Executive Board

Based on our currently available insights arrived from a holistic Trends Ideas Future factors Soft signals analysis of the opportunities and risks, the Executive Board of Hannover Re cannot discern any risks that could jeopardise the continued existence of the Hannover Re Group in the short or medium term or have a material and lasting effect on its assets, financial position or net income. We are convinced that: Analysis • our established system of risk management affords us Concrete specification a transparent overview of the current risk situation at all times • our overall risk profile is appropriate, and Assessment • our opportunity management plays an important part in Hannover Re’s profitable growth.

As an internationally operating reinsurance group, we move Handover to line Combined management report responsibility in a highly complex environment. Nevertheless, thanks to our business activities in all lines of reinsurance we are able to achieve optimal risk spreading through geographical and risk-specific diversification while at the same time maintain- Risk assessment in the Product launch under line ing a balanced opportunity / risk profile. We consider the risks context of the “new product responsibility described in the above sections to be manageable, particularly process”, as appropriate because our steering and monitoring measures are effectively and closely interlinked. Despite these diverse mechanisms, individual and especially accumulation risks can decisively Corporate strategy affect our assets, financial position and net income. In accord- Long-term success in a competitive business ance with our understanding of risk, however, we consider not only risks but also at the same time opportunities. We therefore only enter into those risks that go hand-in-hand with opportunities. Our steering and monitoring tools as well as our organisational and operational structure ensure that we identify risks at an early stage and are able to act on our opportunities. Our central monitoring tool is the system of risk management that we have installed Group-wide, which efficiently brings together both qualitative and quantitative information. Most notably, the interplay between domestic and foreign risk management functions affords us a holistic and Group-wide overview.

Our own evaluation of the manageability of existing risks is confirmed by various financial indicators and external assessments. Specific monitoring indicators, corresponding notification thresholds and potential escalation steps are defined on a mandatory basis in our central system of limits and thresholds for the material risks of the Hannover Re Group. As a result, the system provides us with a precise overview of potentially undesirable developments in the defined risk tolerances and enables us to react in a timely manner. One testament to our financial stability, for example, is the growth of our shareholders’ equity: the total policyholders’ surplus (hybrid capital, non-controlling interests and shareholders’ equity) stands at 140% of the corresponding figure from 2011. In this context, our necessary equity resources are determined by the requirements of our economic capital model, solvency regulations, the

Hannover Re | Annual Report 2015 97 assumptions of rating agencies with respect to our target rat- We would also refer to the explanatory remarks on the financial ing and the expectations of our clients and shareholders. This strength ratings of our subsidiaries in the “Financial position” increase gives us a sufficient capital cushion to be able both to section of the management report on page 59. In addition, the absorb risks and act on business opportunities that may arise. risk trigger mechanism and internal monitoring system are Similarly, our very good ratings (see page 58) also testify to reviewed annually by the independent auditor. The Group-wide our financial stability. The quality of our Enterprise Risk Man- risk management system is also a regular part of the audits agement (ERM) is evaluated separately by Standard & Poor’s. In conducted by the internal audit function. For additional infor- the year under review Standard & Poor’s gave our risk manage- mation on the opportunities and risks associated with our busi- ment its highest possible grade of “very strong”. Most notably, ness please see the Forecast on page 126 et seq. our established risk management culture – one of the rating agency’s benchmark criteria – promotes the development of appropriate risk monitoring systems and strategic risk management. The evaluation further encompasses the areas of risk controls, emerging risk management and risk models. This external appraisal confirms the quality of our holistic approach to risk management.

98 Hannover Re | Annual Report 2015 Enterprise management

were and are complied with in the reality of the company’s Declaration on Corporate business activities. If recommendations were not acted upon, Governance pursuant to § 289a this is to be explained and disclosed as part of the Declaration Commercial Code (HGB) of Conformity. The positive attitude of Hannover Rück SE towards the Code The objective of Hannover Rück SE continues to be to con- is not contradicted by the fact that in the year under review solidate and further expand its position as one of the leading, we again did not comply with certain Code recommendations, globally operating reinsurance groups of above-average prof- since a well justified deviation from the recommendations of itability. In aspiring towards this goal, it is particularly impor- the Code may – as in the present cases – be very much in the tant to observe and fulfil the principles of good and sustainable interests of good corporate governance tailored to a particular enterprise management. In so doing, we not only comply with company, i. e. by reflecting enterprise- and industry-specific the German Corporate Governance Code (DCGK, hereinafter features (cf. Foreword to the German Corporate Governance Combined management report also referred to as the Code), but have also developed our Code). Based on what is still a high degree of fulfilment of the own model for responsible enterprise management which we recommendations and suggestions of the Code, Hannover Re consistently pursue and adjust to the latest requirements in continues to rank very highly among the companies listed on accordance with our best practice standards. the DAX and MDAX.

The Executive Board and Supervisory Board of Hannover Rück SE expressly support the suggestions and recommendations Declaration of Conformity pursuant to of the German Corporate Governance Code that are practica- § 161 Stock Corporation Act (AktG) ble for the reinsurance industry and recognise their central importance in guiding our activities. The principles of respon- The Executive Board and Supervisory Board of Hannover Rück sible and good enterprise management therefore constitute the SE declare pursuant to § 161 Stock Corporation Act (AktG) core of our internal Corporate Governance principles (www. that – with the following divergences – the company was and hannover-re.com/50889/corporate-governance-principles.pdf). continues to be in conformity with the recommendations made We cultivate integrity at all times in our dealings with business by the Government Commission on the German Corporate Gov- partners, staff, shareholders and other stakeholder groups and ernance Code published by the Federal Ministry of Justice on support the principles of value-based and transparent enter- 12 June 2015 in the official section of the Federal Gazette: prise management and supervision defined in the German Cor- porate Governance Code. The Supervisory Board, Executive Code Item 4.2.3 Para. 2; Caps on the amount of Board and employees of Hannover Rück SE identify with these variable compensation elements in management principles, which thus form part of our corporate self-image. board contracts The Executive Board ensures that the principles are observed Item 4.2.3 Para. 2 Sentence 6 of the Code recommends that Group-wide. there should be a maximum limit on the amount of variable compensation paid to members of the management board. Hannover Rück SE hereby provides insight into its enterprise management practices as part of the Declaration on Corpo- The variable compensation of the members of the Executive rate Governance pursuant to § 289a Commercial Code (HGB): Board is granted in part in the form of Hannover Re share awards. The maximum number of share awards granted at the time of allocation depends upon the total amount of variable compensa- Corporate Governance tion, which is subject to an upper limit (cap), i. e. the allocation of share awards is limited by the cap. The share awards have a As an instrument of self-regulation for the business world, vesting period of four years. During this period the members of the German Corporate Governance Code – the latest version the Executive Board therefore participate in positive and negative of which dates from 5 May 2015 – sets out recommendations developments at the company, as reflected in the share price. The and suggestions that are intended to maintain and foster the equivalent value of the share awards is paid out to the members trust of investors, customers, employees and the general pub- of the Executive Board after the end of the vesting period. The lic in the management and supervision of German companies. amount paid out is determined according to the share price of Although the Code does not have binding legal force, the enter- the Hannover Re share applicable at the payment date plus an prises addressed by the Code are nevertheless required by amount equivalent to the total dividends per share distributed § 161 Stock Corporation Act (AktG) to provide an annual dec- during the vesting period. The share awards consequently follow laration as to whether or not the recommendations of the Code the economic fortunes of the Hannover Re share.

Hannover Re | Annual Report 2015 99 The amount of variable compensation deriving from the grant- Code Item 5.3.2; Independence of the Chair of the ing of share awards is thus capped at the time when the share Audit Committee awards are allocated, but it is not capped again at the time of Item 5.3.2 Sentence 3 of the Code recommends that the Chair payment. Bearing in mind the harmonisation of the interests of the Audit Committee should be independent. of shareholders and of the members of the Executive Board of Hannover Rück SE that is sought through the share awards, The current Chairman of the Finance and Audit Committee the company does not consider further limitation of the amount is at the same time also the Chairman of the Board of Man- of variable remuneration resulting from the granting of share agement of the controlling shareholder and hence cannot be awards at the time of payment to be expedient. From the com- considered independent. As already explained in advance in pany’s perspective, the use of Hannover Re share awards as a the justification for divergence from Code Section 5.2 Para. 2, method of payment constitutes – in economic terms – a com- the current Chairman of the Supervisory Board is, however, pulsory investment in Hannover Re shares with a four-year optimally suited to chairing the Finance and Audit Commit- holding period. tee. This assessment is also not cast into question by the fact that the Committee Chairman cannot therefore be considered For formal purposes and as a highly precautionary measure, independent within the meaning of the German Corporate Gov- Hannover Rück SE is therefore declaring a divergence from ernance Code. Furthermore, since his service as Chief Finan- Code Item 4.2.3 Para. 2. cial Officer of Hannover Rück SE dates back to a period more than ten years ago, it is also the case that the reviews and Code Item 4.2.3 Para. 4; Caps on severance checks performed by the Finance and Audit Committee no payments in management board contracts longer relate to any timeframe within which he himself was Pursuant to Item 4.2.3 Para. 4 of the Code, when management still a member of the Executive Board or decisions initiated by board contracts are concluded care should be taken to ensure him as a member of the Executive Board were still being real- that payments made to a member of the management board ised. In the opinion of Hannover Rück SE, it is therefore in the upon premature termination of his or her contract of service interest of the company to diverge from this recommendation. do not exceed a certain amount. Hannover, 3 November 2015 Premature termination of a service contract may only take the form of cancellation by mutual consent. Even if the Supervisory Board insists upon setting a severance cap when concluding or Executive Board, Supervisory Board renewing an Executive Board contract, this does not preclude the possibility of negotiations also extending to the severance cap in the event of a member leaving the Executive Board. In Further enterprise management addition, the scope for negotiation over a member leaving the principles of Hannover Re Executive Board would be restricted if a severance cap were agreed, which could be particularly disadvantageous in cases In addition to the Corporate Governance principles, Han- where there is ambiguity surrounding the existence of serious nover Rück SE has adopted a more extensive Code of Conduct cause for termination. In the opinion of Hannover Rück SE, it (www.hannover-re.com/50943/code-of-conduct.pdf). Comple- is therefore in the interest of the company to diverge from this menting our corporate strategy and the Corporate Governance recommendation. principles, it establishes rules governing integrity in the behaviour of all employees of Hannover Rück SE and is intended to Code Item 5.2 Para. 2; Chair of the Audit Committee help members of staff cope with the ethical and legal chal- Pursuant to Code Item 5.2 Para. 2, the Chair of the Supervisory lenges that they face as part of day-to-day work. The rules Board shall not chair the Audit Committee. defined in the Code of Conduct reflect the high ethical and legal standards that guide our actions worldwide. It is our belief that The current Chairman of the Supervisory Board of Hannover integrity in dealings with our stakeholders constitutes the foun- Rück SE served as the company’s Chief Financial Officer in the dation of a successful enterprise. In both our strategic planning period from 1994 to 2002. During this time he acquired superb and our day-to-day business activities, we therefore aspire to knowledge of the company and he is equipped with extensive consistently apply the highest ethical and legal standards; for professional expertise in the topics that fall within the scope our actions and the way in which every single one of us pre- of responsibility of the Finance and Audit Committee. With sents and conducts himself or herself are crucial in shaping this in mind, the serving Chairman of the Supervisory Board is the image of Hannover Rück SE. optimally suited to chairing the Audit Committee. In the opinion of Hannover Rück SE, it is therefore in the interest of the company to diverge from this recommendation.

100 Hannover Re | Annual Report 2015 Sustainability of enterprise management Working practice of the Executive Board and Supervisory Board The strategic orientation of Hannover Rück SE towards sustainability constitutes an increasingly important element of the The Executive Board and Supervisory Board of Hannover Rück enterprise strategy. The aim is to achieve commercial success SE work together on a trusting basis to manage and moni- on the basis of a solid business model in accordance with the tor the company. In accordance with the Rules of Procedure needs of our staff and the company as well as with an eye to of the Executive Board, matters of fundamental importance protecting the environment and conserving natural resources. require the consent of the Supervisory Board. The Supervi- We strive to reduce as far as possible the greenhouse gas emis- sory Board is comprised of nine members. Six members are sions produced by our day-to-day business activities in order elected by the shareholders at the Annual General Meeting, to come closer to reaching our goal of carbon neutrality. In so three members are appointed by the Employee Council. The doing, we are demonstrably taking responsibility for a sustain- Supervisory Board appoints the members of the Executive able future. In 2011 we defined for the first time a concrete Board. Since members of the Supervisory Board cannot at the Sustainability Strategy setting out our primary objectives in same time belong to the Executive Board, a high degree of this field. Not only that, in the year under review we again independence in the oversight of the Executive Board is thus presented our Sustainability Report in the form of a so-called already ensured by structural means. In addition, the Super- “GRI Report” (Global Reporting Initiative). Further information visory Board is kept informed on a regular and timely basis Combined management report on the topic of sustainability is provided on our website (www. of the business development, the execution of strategic deci- hannover-re.com/60729/sustainability). sions, material risks and planning as well as relevant compliance issues. The Chairman of the Supervisory Board stays in Three of the members of the Supervisory Board in the year regular contact with the Chairman of the Executive Board in under review were women. In addition, one of the members of order to discuss with him significant business occurrences. the Supervisory Board’s Nomination Committee is a woman. The composition of the Executive Board (including areas of The programme for the advancement of women that had been responsibility) as well as of the Supervisory Board and its com- implemented within the workforce in 2012 encourages the mittees is set out on pages 6 et seq. and 241 respectively of fostering of promising young female professionals through a the present Annual Report. variety of targeted measures and supports enlargement of the proportion of women in management positions. The Rules of Procedure of the Executive Board are intended to ensure that a consistent business policy is elaborated and implemented for the company in accordance with its strate- Targets pursuant to §§ 76 Para. 4, gic objectives. Within the framework of a consistent business 111 Para. 5 Stock Corporation Act policy, the principle of “delegation of responsibility” enjoys special status. In the interests of shareholders, importance is In accordance with the Act for the Equal Participation of expressly attached to an organisation that facilitates cost-ef- Women and Men in Leadership Positions in the Private Sector fective, quick and unbureaucratic decision processes. Open and the Public Sector, the Supervisory Board of the company and trusting cooperation geared to the interest of the whole is was required by 30 September 2015 to define a target quota the foundation of success. In this context, the members of the for women on the Supervisory Board and Executive Board of Executive Board bear joint responsibility for the overall man- the company in the period until 30 June 2017. After extensive agement of business. Irrespective of their overall responsibility, deliberations the Supervisory Board decided, in due consid- each member of the Executive Board leads their own area of eration of the term of office of the Supervisory Board and the competence at their individual responsibility within the bounds current mandates and contracts of service of the members of the resolutions adopted by the Executive Board. Only per- of the Executive Board, to define within the specified period sons under the age of 65 may be appointed to the Executive – without prejudice to possible decisions to the contrary that Board. The term of appointment shall be determined such that may be taken as warranted when the time comes – a target it expires no later than the end of the month in which the mem- quota for women on the Supervisory Board of 30% and an ber of the Executive Board turns 65. The Supervisory Board anticipated continued quota of zero for the Executive Board. takes account of diversity considerations in the composition Should events result in the currently unforeseeable appoint- of the Executive Board. ment of a new member of the Executive Board, the Supervisory Board shall give preference to a potential female candidate The Rules of Procedure of the Supervisory Board provide inter in case of equal personal aptitude and professional qualifica- alia that each member of the Supervisory Board must have tions. The company’s Executive Board defined a target quota the knowledge, skills and professional experience required of 16.8% with the same deadline for the two levels of senior for orderly performance of their tasks and that the Supervisory management below the Executive Board. Board must have a sufficient number of independent members. Currently, four of the six shareholder representatives are independent as defined by Item 5.4.2 of the German Corporate Governance Code. At least one independent member shall have

Hannover Re | Annual Report 2015 101 technical expertise in the fields of accounting and the audit- auditor, the determination of the audit concentrations and the ing of financial statements. Persons suggested to the Annual fee agreement. The minutes of the meetings of the Finance General Meeting as candidates for election to the Supervisory and Audit Committee are also made available to the members Board may not be older than 72 at the time of their election of the Supervisory Board who do not sit on the committee. and shall normally not belong to the Supervisory Board as a member for longer than three full consecutive terms of office; The Standing Committee prepares personnel decisions for the the term of office commencing from the end of the 2014 Annual Supervisory Board. It bears responsibility for granting loans General Meeting shall be counted as the first term of office to the group of persons specified in §§ 89 Para. 1, 115 Stock in this regard. Nominations shall take account of the compa- Corporation Act and those considered equivalent pursuant to ny’s international activities as well as diversity. Furthermore, § 89 Para. 3 Stock Corporation Act as well as for approving it shall be ensured that the proposed person can allocate the contracts with Supervisory Board members in accordance with expected amount of time. For their part, each sitting member § 114 Stock Corporation Act. It exercises the powers arising of the Supervisory Board shall also ensure that they have suffi- out of § 112 Stock Corporation Act in lieu of the Supervisory cient time to discharge their mandate. The Supervisory Board Board and – in cooperation with the Executive Board – ensures meets at least twice each calendar half-year. If a member of that long-term succession planning is in place. the Supervisory Board has only participated in half of the meetings of the Supervisory Board and the committees or less in a The Nomination Committee is tasked with proposing to the financial year, this shall be noted in the Supervisory Board’s Supervisory Board appropriate candidates for the nominations report. No more than two former members of the company’s that it puts forward to the Annual General Meeting for election Executive Board may belong to the Supervisory Board. to the Supervisory Board.

In the year under review the Supervisory Board adopted the For further details of the activities of the Supervisory Board regular procedure to evaluate the efficiency of the Supervisory committees please see the explanations provided in the Super- Board’s work in accordance with Item 5.6 of the German Cor- visory Board Report on pages 238 to 240. porate Governance Code.

Working practice of the committees of the Compliance Supervisory Board In order to efficiently perform its tasks the Supervisory Board Hannover Rück SE considers a properly functioning compli- has formed a number of committees: the Finance and Audit ance structure to be an essential tool for ensuring compliance Committee, the Standing Committee and the Nomination Com- with external rules and regulations as well as requirements mittee. The Supervisory Board committees are each comprised imposed internally by the company. Our compliance structure, of three members and prepare matters within their scope of which consists of compliance modules precisely tailored to the competence for discussion and adoption of a resolution by the specific features of our Property & Casualty and Life & Health full Supervisory Board. In addition, the committees are also reinsurance business groups, facilitates optimal application. assigned their own authority to adopt resolutions. The compliance committees are comprised of members from the respective business groups as well as from the areas of The Finance and Audit Committee monitors the accounting Legal, Finance, Accounting and Investments. The chairs report process and the effectiveness of the internal control system, the directly to the Executive Board. This structure safeguards risk management system and the internal auditing system. It adherence to the standards that have been set. also handles issues relating to compliance and the information system for the Supervisory Board and discusses the interim The compliance report for the 2015 calendar year will be sub- reports as well as the semi-annual reports prior to their publi- mitted to the Finance and Audit Committee in March 2016. The cation. It prepares the Supervisory Board’s examination of the reporting sets out the structure and diverse range of activities annual financial statement, management report and proposal of Hannover Re in this regard. The findings of the separate data for the appropriation of profit as well as of the consolidated privacy reporting for the 2015 calendar year are also included financial statement and Group management report. In this con- in the compliance report. After in-depth examination of topics text, the Finance and Audit Committee receives detailed infor- such as directors’ dealings, ad hoc and other disclosure require- mation on the auditor’s view of the net assets, financial position ments, the insider register, consulting agreements, data protec- and results of operations as well as explanations of the effects tion, international sanctions and the Group-wide whistleblower of any modified recognition and measurement principles on the system, the report concludes that only a few circumstances net assets, financial position and results of operations together have been identified which point to breaches of relevant com- with available alternatives. In addition, the committee prepares pliance standards. After detailed exploration of these incidents, the Supervisory Board’s decision on the commissioning of the the necessary safeguards were put in place to ensure that in independent auditor for the financial statements. It considers the future Hannover Re is in conformity with the internal and matters associated with the necessary independence of the external requirements governing its business activities. auditor, the awarding of the audit mandate to the independent

102 Hannover Re | Annual Report 2015 Risk monitoring and steering described; we also explain the principles on which the remuneration for senior executives below the level of the Executive The risk management system applicable throughout the entire Board is based. Hannover Re Group is based on the risk strategy, which in turn is derived from the corporate strategy. A core component is the The remuneration report is guided by the recommendations of systematic and comprehensive recording of all risks that from the German Corporate Governance Code and contains infor- the current standpoint could conceivably jeopardise the com- mation which forms part of the notes to the 2015 consolidated pany’s profitability and continued existence. Further details in financial statement as required by IAS 24 “Related Party Dis- this regard may be obtained from the risk report contained in closures”. Under German commercial law, too, this informa- this Annual Report on page 72 et seq. tion includes data specified as mandatory for the notes (§ 314 HGB) and the management report (§ 315 HGB). These details are discussed as a whole in this remuneration report and presented in summary form in the notes. Information regarding the following items is provided in the remuneration report: The provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and of the Insurance Super- • Remuneration report for the Executive Board vision Act (VAG) in conjunction with the Regulation on the Combined management report and disclosure of the remuneration received Supervisory Law Requirements for Remuneration Schemes by Supervisory Board members pursuant to in the Insurance Sector (VersVergV) have been observed. In Items 4.2.5 and 5.4.6 of the German Corporate addition, we took into account the more specific provisions of Governance Code, DRS 17 (amended 2010) “Reporting on the Remuneration of • Securities transactions pursuant to Item 6.2 of Members of Governing Bodies”. the German Corporate Governance Code, • Shareholdings pursuant to Item 6.2 of the German Corporate Governance Code. Remuneration of the Executive Board Information on share-based payment pursuant to Responsibility Item 7.1.3 of the German Corporate Governance Code In order to efficiently perform its tasks the Supervisory Board is provided in Section 8.3 of the notes “Share-based payment”, page 227 et seq., and in the remuneration has formed various committees. The Standing Committee pre- report with respect to the members of the Executive pares remuneration-related matters of content relating to the Board. Executive Board for discussion and adoption of a resolution by a full meeting of the Supervisory Board. In addition to the present Declaration on Corporate Governance, the Corporate Governance Report and Objective, structure and system of Executive the reports of recent years are published on our web- Board remuneration site pursuant to Item 3.10 of the German Corporate The total remuneration of the Executive Board and its split into Governance Code (www.hannover-re.com/200801/ fixed and variable components conform to regulatory require- declaration-of-conformity). ments – especially the provisions of the Act on the Adequacy of Management Board Remuneration (VorstAG) and the Regu- lation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV). An independent expert’s report confirms that the system of remuneration meets the requirements of Art. 275 Commission Delegated Regula- Remuneration report tion (EU) 2015 / 35 for a remuneration policy and remuneration practices that are in line with the undertaking’s business, The remuneration report summarises the principles used to strategy and risk profile. determine the remuneration of the Executive Board of Han- nover Rück SE and explains the structure, composition and The amount and structure of the remuneration of the Executive amount of the components of the remuneration received by Board are geared to the size and activities of the company, its the Executive Board in the 2015 financial year on the basis of economic and financial position, its success and future pros- the work performed by the Board members for Hannover Rück pects as well as the customariness of the remuneration, making SE and companies belonging to the Group. reference to the benchmark environment (horizontal) and the remuneration structure otherwise applicable at the company In addition, the amount of remuneration paid to the Super- (vertical). The remuneration is also guided by the tasks of the visory Board on the basis of its work for Hannover Rück SE specific member of the Executive Board, his or her individual and companies belonging to the Group as well as the princi- performance and the performance of the full Executive Board. ples according to which this remuneration is determined are

Hannover Re | Annual Report 2015 103 With an eye to these objectives, the remuneration system has two components: fixed salary / non-cash compensation and variable remuneration. The variable remuneration is designed to take account of both positive and negative developments. Overall, the remuneration is to be measured in such a way that it reflects the company’s sustainable development and is fair and competitive by market standards. In the event of 100% goal attainment the remuneration model provides for a split into roughly 40% fixed remuneration and roughly 60% variable remuneration.

Fixed remuneration (approx. 40% of total remuneration upon 100% goal attainment)

Measurement basis and payment procedures for fixed remuneration M 71

Components Measurement basis / Condition of payment Paid out parameters Basic remuneration; Function, responsibility, Contractual stipulations 12 equal monthly instalments length of service on the Non-cash compensation, fringe Executive Board benefits: Accident, liability and luggage insurance, company Remuneration reviewed by the car for business and – if de- Supervisory Board normally sired – personal use (tax on the at two-year intervals. Since non-cash benefit payable by 2014 gradual conversion of the Board member), reimburse- Executive Board contracts: ment of travel expenses and review of annual fixed salary other expenditures incurred in during the contract period no the interest of the company longer applies.

Variable remuneration (approx. 60% of total remuneration upon 100% goal attainment) The profit- and performance-based remuneration (variable remuneration) is contingent on certain defined results and the attainment of certain set targets. The set targets vary according to the function of the Board member in question. The variable remuneration consists of a profit bonus and a performance bonus.

The variable remuneration is defined at the Supervisory Board meeting that approves the consolidated financial statement for the financial year just ended.

The following chart summarises the make-up of the variable remuneration components. For details of measurement and payment procedures please see the two tables following the chart.

104 Hannover Re | Annual Report 2015 Overview of the composition of variable remuneration M 72

Upon 100% goal attainment

Approx. 40% fixed remuneration Approx. 60% variable remuneration

Measurement (variable remuneration)

Goals according to area Profit bonus Performance bonus of Board responsibility (50 – 70%) 1 (30 – 50%) 1

Indicator for perfor- Group RoE Personal and divisional targets (IVC) 2

mance measurement over the last 3 years for the financial year Combined management report

Variable remuneration as per regulatory requirements

Payment procedure Cash 3 Bonus bank 3 HR share awards 3

Timing of payment Annually (60%) 3 years (20%) 4 years (20%)

Payment of variable remuneration

1 Chief Executive Officer / Chief Financial Officer 70% profit bonus, 30% performance bonus (personal targets); Board members with divisional responsibility: 50% profit bonus, 50% performance bonus (25% personal targets / 25% divisional targets) 2 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units 3 Split defined by legal minimum requirements

Hannover Re | Annual Report 2015 105 Measurement bases / conditions of payment for variable remuneration M 73

Component Measurement basis / parameters Condition of payment Profit bonus Proportion of variable The profit bonus is dependent on the risk-free interest rate and the Contractual stipulations remuneration: average Group return on equity (RoE) of the past three financial Chief Executive Officer / years. Attainment of three-year Chief Financial Officer: 70%; targets Board member with divisional An individually determined and contractually defined basic amount responsibility: 50% is paid for each 0.1 percentage point by which the RoE of the past Decision of the Supervisory three financial years exceeds the risk-free interest rate of 1.8%. Board Goal attainment of 100% corresponds to an RoE of 10.6%. Goal attainment can amount to a maximum of 200% and a minimum of -100%.

The IFRS Group net income (excluding non-controlling interests) and the arithmetic mean of the IFRS Group shareholders’ equity (excluding non-controlling interests) at the beginning and end of the financial year are used to calculate the RoE.

The risk-free interest rate is the average market rate for 10-year In view of the market German government bonds over the past 5 years and is set at an interest rate the Supervisory agreed level of 2.8%. The arrangements governing the profit bonus Board has set the risk-free may be adjusted if the risk-free interest rate of 2.8% changes to interest rate at 1.8%. such an extent that an (absolute) deviation of at least one percentage point arises.

106 Hannover Re | Annual Report 2015 Component Measurement basis / parameters Condition of payment Performance bonus The performance bonus for the Chief Executive Officer and the Chief Financial Officer is arrived at from individual qualitative and, as appropriate, quantitative targets defined annually by the Supervisory Board that are to be accomplished in the subsequent year. For members of the Executive Board with responsibility for a certain division, the performance bonus consists in equal parts of the divisional bonus and the individual bonus. Divisional bonus The basis for the divisional bonus is the return generated on the Attainment of three-year Proportion of variable capital allocated to the division in the respective 3-year period just targets (basis for 2013 and remuneration: ended ( = RoCA (Return on Capital Allocated)). 2014: divisional perfor- Board member with divisional mance from 2013 onwards) responsibility: 25% An individually determined amount specified in the service contract is calculated for each 0.1 percentage point by which the average Contractual agreement 3-year RoCA exceeds the level of 0%. Decision of the Supervisory Goal attainment of 100% is achieved in property and casualty rein- Board according to its best surance with a RoCA of 9.1% and in life and health reinsurance with judgement a RoCA of 10.1%. These RoCA values are above the cost of capital and thus generate positive intrinsic value creation (IVC 1). Combined management report Goal attainment can amount to a maximum of 200% and from 2015 onwards a minimum of -100%.

The method used to calculate the IVC as a basis for determining the divisional performance is checked by independent experts.

The divisional bonus is determined by the Supervisory Board according to its best judgement. The determination also takes into account, in particular, the contribution made by the business under the responsibility of the Board member concerned to the achieved divisional performance and the relative change in the average IVC in the remuneration year. The Supervisory Board may make additions to or deductions from the arithmetically calculated values at any time in the event of over- or underfulfilment of the criteria.

Special arrangements for 2013 and 2014: the basis for the average RoCA is the divisional performance from 2013 onwards; the minimum divisional bonus is EUR 0. Individual bonus Personal qualitative, quantitative targets; Attainment of annual targets Proportion of variable individual contribution to the overall result, leadership skills, remuneration: innovative skills, entrepreneurial skills, specific features of area of Decision by the Supervisory Chief Executive Officer / responsibility. Board according to its best Chief Financial Officer: 30%; judgement. Board member with divisional The individual bonus for goal attainment of 100% is contractually responsibility: 25% stipulated. Over- and underfulfilment result in additions / deductions.

The minimum individual bonus amounts to EUR 0 and the maximum is double the bonus payable upon complete goal attainment.

1 An instrument of value-based management used to measure the attainment of long-term goals on the level of the Group, business groups and operational units (see also page 26 et seq.).

Hannover Re | Annual Report 2015 107 Payment procedures for the total variable remuneration Of the total amount of defined variable remuneration, a partial statement. The remaining amount of 40% is initially withheld amount of 60% is paid out in the month following the Super- as explained below with a view to encouraging long-term value visory Board meeting that approves the consolidated financial creation:

Payment procedures for the total variable remuneration M 74

Short-term Medium-term Long-term 60% of the variable remuner- 20% of the variable remuneration in the Automatic granting of virtual Hannover Re share ation with the next monthly bonus bank; awards (HR-SAs) with a value equivalent to 20% of salary payment the variable remuneration; following the Supervisory Board withheld for three years; resolution payment of the value calculated at the payment date the positive amount contributed three years after a vesting period of four years; prior to the payment date is available for payment, provided this does not exceed the value of the share on awarding / payment: balance of the bonus bank in light of credits / unweighted arithmetic mean of the Xetra closing debits up to and including those for the prices five trading days before to five trading days financial year just ended; after the meeting of the Supervisory Board that approves the consolidated financial statement; an impending payment not covered by a positive balance in the bonus bank is omitted; additional payment of the sum total of all dividends per share paid out during the vesting period; a positive balance in the bonus bank is carried forward to the following year after changes in a cumulative amount of 10% or more in deduction of any payment made; a nega- the value of the HR-SAs caused by structural meas- tive balance is not carried forward to the ures trigger an adjustment; following year; the Board member has no entitlement to the loss of claims due from the bonus bank in delivery of shares. special cases: resignation from office without a compelling reason; contract extension on the same conditions is rejected;

no interest is paid on credit balances. Negative variable total bonus = payment of EUR 0 variable remuneration. Any minus value of the variable total bonus for a financial year is transferred in full to the bonus bank (see “Medium-term” column).

108 Hannover Re | Annual Report 2015 Handling of payment of variable remuneration Other information components in special cases The contracts of the Board members do not include a com- In the event of voluntary resignation or termination / dismissal mitment to benefits in the event of a premature termination by the company for a compelling reason or if an offered con- of employment on the Executive Board owing to a change of tract extension on the same conditions (exception: the mem- control. Only the conditions for the granting of share-based ber of the Executive Board has reached the age of 60 and has remuneration in the form of stock appreciation rights provide served as a member of the Executive Board for two terms of for special exercise options in the event of the merger, spin-off office) is declined, all rights to payment of the balances from or demerger of Hannover Re into another legal entity. the bonus bank and from the HR-SAs are forfeited. With regard to Item 4.2.3. Para. 2 “Caps on the amount of vari- If the contractual relationship ends normally prior to the end able compensation elements in management board contracts” of the vesting period for the bonus bank or HR-SAs, and if a and Item 4.2.3 Para. 4 “Caps on severance payments in man- contract extension is not offered, the member of the Execu- agement board contracts” of the German Corporate Govern- tive Board retains his entitlements to payment from the bonus ance Code, we would refer the reader to our remarks in the bank – making reference to a defined forward projection of the 2015 Declaration of Conformity contained in the section “State- bonus bank – and for already awarded HR-SAs. ment of enterprise management practices” on page 99 et seq. of this Group Annual Report. Combined management report All claims to the allocation of amounts to the bonus bank and / or awarding of HR-SAs after leaving the company are If the company insists on a non-competition clause with excluded. In cases where an individual leaves the company Mr. Wallin for two years after the termination of his service because of non-reappointment, retirement or death this shall contract, he shall be recompensed in a monthly amount of not apply with respect to claims to variable remuneration 50% of his most recent fixed remuneration. Income earned acquired (pro rata) in the final year of the Board member’s through the application of his working capacity elsewhere shall work for the company. be counted towards this compensation insofar as such income in combination with the compensation exceeds 100% of the Variable remuneration under the old remuneration most recently received fixed remuneration. The non-compe- structure (until 2011) tition clause shall not apply if the contract ends prior to the The virtual stock option plan with stock appreciation rights age of 65 because the company does not extend it or because existing under the old remuneration structure remains in force Mr. Wallin declines an extension offered to him on what are for all members of the Executive Board until all stock appreci- for him inferior terms, or if the premature termination or non- ation rights have been exercised or have lapsed. In the 2015 extension is due to a compelling reason for which the com- financial year no further stock appreciation rights were granted pany is responsible. to active Board members. Of the stock appreciation rights granted in previous years, active and former Board members Amount of remuneration received by the exercised amounts totalling EUR 2.0 million (previous year: Executive Board EUR 0.5 million) in 2015. The total remuneration received by the Executive Board of Han- nover Rück SE on the basis of its work for Hannover Rück SE As at 31 December 2015 active members of the Executive and the companies belonging to the Group is calculated from Board had at their disposal a total of 79,464 (228,957) granted, the sum of all the components set out in the following table but not yet exercised stock appreciation rights with a fair value pursuant to DRS 17 (amended 2010). of EUR 0.7 million (EUR 2.1 million). The remuneration (excluding pension payments) received by Continued payment in case of disability former members of the Executive Board totalled EUR 0.7 mil- In the event of temporary incapacity for work the fixed annual lion (EUR 0.8 million). salary shall continue to be paid in the same amount, at most until termination of the service contract.

If a member of the Executive Board is permanently incapacitated for work during the period of the service contract, the service contract shall terminate at the end of the sixth month after which the permanent incapacity for work is established – although no later than at the end of the service contract.

Hannover Re | Annual Report 2015 109 Total remuneration of the active members of the Executive Board pursuant to DRS 17 (amended 2010) M 75

Name Financial year Non-performance-based remuneration Performance-based remuneration 1 Performance-based remuneration 1 Total Number of share awards 6 Basic salary Non-cash com- Short-term Medium-term Long-term 2014 = Actual pensation / fringe Variable remuneration payable Bonus bank Share awards 2015 = Estimate benefits 2 60% 3 Netted remu- 20% 20% neration from (allocation) 4 (allocation) 5 seats with Group bodies in EUR thousand in EUR thousand Ulrich Wallin 2015 596.4 14.8 650.4 216.8 216.8 1,695.2 2,021 2014 569.7 16.2 678.4 226.1 226.1 1,716.5 2,430 Sven Althoff 7 2015 280.0 14.8 334.2 110.8 112.1 851.9 1,004 2014 199.0 7.2 183.1 43.4 78.6 511.3 1,050 Claude Chèvre 2015 380.0 12.8 440.1 146.7 146.7 1,126.3 1,411 2014 348.7 13.2 416.9 139.0 139.0 1,056.8 1,494 Jürgen Gräber 2015 445.1 18.1 508.1 169.3 169.3 1,309.9 1,432 2014 428.0 16.0 456.4 152.2 152.2 1,204.8 1,873 Dr. Klaus Miller 2015 356.1 3.7 366.5 122.1 122.1 970.5 1,187 2014 342.4 13.9 404.5 134.9 134.9 1,030.6 1,438 Dr. Michael Pickel 2015 356.1 12.0 402.1 134.1 134.1 1,038.4 1,145 2014 342.4 22.5 368.7 122.9 122.9 979.4 1,483 Roland Vogel 2015 422.9 14.8 372.5 38.6 124.2 124.2 1,058.6 1,155 2014 406.6 15.4 398.9 49.5 133.0 133.0 1,086.9 1,460 Total 2015 2,836.6 91.0 3,073.9 38.6 1,024.0 1,025.3 8,050.8 9,355 Total 2014 2,636.8 104.4 2,906.9 49.5 951.5 986.7 7,586.3 11,228

1 As at the balance sheet date no Board resolution was available regarding the performance-based remuneration for 2015. The variable remuneration is recognised on the basis of estimates and the provisions constituted accordingly. 2 The non-cash compensation has been carried in the amounts established for tax purposes. 3 In 2015 EUR 110,100 more in variable remuneration was paid out to Board members for 2014 than had been reserved. 4 The nominal amount is stated; full or partial repayment in 2019, depending on the development until such time of the balance in the bonus bank. In 2015 altogether EUR 36,100 more than had been originally reserved was allocated to the bonus bank for 2014. 5 The nominal amount is stated; virtual Hannover Re share awards are automatically granted in an amount equivalent to 20% of the variable remuneration. The equivalent amount will be paid in 2020 at the prevailing share price of Hannover Re. In 2015 nominal amounts of EUR 37,400 more than had been originally reserved were used as a basis for allocation of the 2014 share awards. 6 In order to calculate the number of share awards for 2015 reference was made to the Xetra closing price of the Hannover Re share on 30 December 2015 (EUR 105.65). The number to be actually awarded is established from the arithmetic mean of the Xetra closing prices of the Hannover Re share in a period from five trading days before to five trading days after the meeting of the Supervisory Board that approves the consolidated financial statement in March 2016. The applicable market price of the Hannover Re share had increased from EUR 74.97 (30 December 2014) to EUR 89.06 by the allocation date (9 March 2015) of the share awards for 2014; the share awards actually allocated for 2014 are shown here, not those estimated in the 2014 Annual Report. 7 Mr. Althoff was appointed to the Executive Board on 1 August 2014. The amounts stated include his remuneration as a senior executive of Hannover Re for the period from 1 January to 31 July 2014.

110 Hannover Re | Annual Report 2015 Total remuneration of the active members of the Executive Board pursuant to DRS 17 (amended 2010) M 75

Name Financial year Non-performance-based remuneration Performance-based remuneration 1 Performance-based remuneration 1 Total Number of share awards 6 Basic salary Non-cash com- Short-term Medium-term Long-term 2014 = Actual pensation / fringe Variable remuneration payable Bonus bank Share awards 2015 = Estimate benefits 2 60% 3 Netted remu- 20% 20% neration from (allocation) 4 (allocation) 5 seats with Group bodies in EUR thousand in EUR thousand Ulrich Wallin 2015 596.4 14.8 650.4 216.8 216.8 1,695.2 2,021 2014 569.7 16.2 678.4 226.1 226.1 1,716.5 2,430 Sven Althoff 7 2015 280.0 14.8 334.2 110.8 112.1 851.9 1,004 2014 199.0 7.2 183.1 43.4 78.6 511.3 1,050 Claude Chèvre 2015 380.0 12.8 440.1 146.7 146.7 1,126.3 1,411 2014 348.7 13.2 416.9 139.0 139.0 1,056.8 1,494 Jürgen Gräber 2015 445.1 18.1 508.1 169.3 169.3 1,309.9 1,432 Combined management report 2014 428.0 16.0 456.4 152.2 152.2 1,204.8 1,873 Dr. Klaus Miller 2015 356.1 3.7 366.5 122.1 122.1 970.5 1,187 2014 342.4 13.9 404.5 134.9 134.9 1,030.6 1,438 Dr. Michael Pickel 2015 356.1 12.0 402.1 134.1 134.1 1,038.4 1,145 2014 342.4 22.5 368.7 122.9 122.9 979.4 1,483 Roland Vogel 2015 422.9 14.8 372.5 38.6 124.2 124.2 1,058.6 1,155 2014 406.6 15.4 398.9 49.5 133.0 133.0 1,086.9 1,460 Total 2015 2,836.6 91.0 3,073.9 38.6 1,024.0 1,025.3 8,050.8 9,355 Total 2014 2,636.8 104.4 2,906.9 49.5 951.5 986.7 7,586.3 11,228

Hannover Re | Annual Report 2015 111 The following table shows the expense for share-based remuneration of the Executive Board in the financial year.

The table is to be viewed independently of the presentation of the total remuneration received by active members of the Executive Board pursuant to DRS 17.

Total expense for share-based remuneration of the Executive Board M 76

Name Year Stock appre- Change in Change in Expense for Total ciation rights reserve in reserve for share awards exercised 2015 for stock share awards allocated appreciation from previous in current in EUR thousand rights years 1 financial year 2 Ulrich Wallin 2015 380.4 (338.8) 633.4 79.8 754.8 2014 72.7 84.7 277.0 58.0 492.4 Sven Althoff 3 2015 63.6 (40.8) 131.8 41.0 195.6 2014 14.6 24.5 86.1 10.9 136.1 Claude Chèvre 2015 – – 215.0 30.7 245.7 2014 – – 90.6 26.0 116.6 Jürgen Gräber 2015 355.2 (319.0) 470.7 56.6 563.5 2014 87.6 54.8 201.3 40.4 384.1 Dr. Klaus Miller 2015 44.6 (38.6) 336.7 34.1 376.8 2014 - 20.5 148.6 28.0 197.1 Dr. Michael Pickel 2015 319.7 (287.1) 353.3 40.2 426.1 2014 78.8 49.3 152.3 29.7 310.1 Roland Vogel 2015 164.7 (146.6) 406.5 54.1 478.7 2014 30.9 37.4 175.9 39.3 283.5 Total 2015 1,328.2 (1,170.9) 2,547.4 336.5 3,041.2 Total 2014 284.6 271.2 1,131.8 232.3 1,919.9

1 The change in the reserve for share awards from previous years derives from the increased market price of the Hannover Re share, the dividend approved for 2014 and the spreading of the expense for share awards across the remaining period of the individual service contracts. 2 The expense for share awards is spread across the remaining period of the individual service contracts. This gives rise to a difference relative to the nominal amount shown in the table of total remuneration. 3 Mr. Althoff was appointed to the Executive Board on 1 August 2014. The figures for 2014 therefore relate in part to his prior work as a senior executive at Hannover Re.

112 Hannover Re | Annual Report 2015 Combined management report

Hannover Re | Annual Report 2015 113 The following two tables show the remuneration of the Exec- utive Board in the 2015 financial year in accordance with the recommendations of the German Corporate Governance Code:

German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 M 77 (target / minimum / maximum remuneration as nominal amounts)

Benefits granted Ulrich Wallin Sven Althoff Claude Chèvre Jürgen Gräber Chief Executive Officer Board member with divisional responsibility Board member with divisional responsibility Board member with divisional responsibility Date joined: 1 August 2014 Coordinator of worldwide property & casualty reinsurance 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 in EUR thousand (Min) (Max) (Min) (Max) (Min) (Max) (Min) (Max) Fixed remuneration 569.7 596.4 596.4 596.4 280.0 280.0 280.0 280.0 348.7 380.0 380.0 380.0 428.0 445.1 445.1 445.1 Fringe benefits 16.2 14.8 14.8 14.8 7.2 14.8 14.8 14.8 13.2 12.8 12.8 12.8 16.0 18.1 18.1 18.1 Total 585.9 611.2 611.2 611.2 287.2 294.8 294.8 294.8 361.9 392.8 392.8 392.8 444.0 463.2 463.2 463.2 One-year variable remuneration 480.0 504.0 0.0 1,008.0 252.0 252.0 0.0 504.0 297.0 342.0 0.0 684.0 360.0 360.0 0.0 720.0 Multi-year variable remuneration 356.6 398.1 (525.9) 734.1 174.2 181.3 (34.9) 349.3 210.9 252.6 (339.2) 480.6 266.8 285.9 (404.1) 525.9 Bonus bank 2014 (2018 1) / 2015 (2019 1) 160.0 168.0 (588.0) 336.0 84.0 84.0 (48.2) 168.0 99.0 114.0 (363.8) 228.0 120.0 120.0 (450.0) 240.0 Share awards 2014 (2019 1) / 2015 (2020 1) 2 160.0 168.0 0.0 336.0 84.0 84.0 0.0 168.0 99.0 114.0 0.0 228.0 120.0 120.0 0.0 240.0 Dividend on share awards for 2013 3 36.6 0.0 0.0 0.0 6.2 0.0 0.0 0.0 12.9 0.0 0.0 0.0 26.8 0.0 0.0 0.0 Dividend on share awards for 2014 0.0 62.1 62.1 62.1 0.0 13.3 13.3 13.3 0.0 24.6 24.6 24.6 0.0 45.9 45.9 45.9 Total 1,422.5 1,513.3 85.3 2,353.3 713.4 728.1 259.9 1,148.1 869.8 987.4 53.6 1,557.4 1,070.8 1,109.1 59.1 1,709.1 Service cost 4 114.3 167.1 167.1 167.1 13.9 750.6 750.6 750.6 91.7 150.1 150.1 150.1 90.2 109.2 109.2 109.2 Total remuneration 1,536.8 1,680.4 252.4 2,520.4 727.3 1,478.7 1,010.5 1,898.7 961.5 1,137.5 203.7 1,707.5 1,161.0 1,218.3 168.3 1,818.3

Benefits granted Dr. Klaus Miller Dr. Michael Pickel Roland Vogel Board member with divisional responsibility Board member with divisional responsibility Chief Financial Officer 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 in EUR thousand (Min) (Max) (Min) (Max) (Min) (Max) Fixed remuneration 342.4 356.1 356.1 356.1 342.4 356.1 356.1 356.1 406.6 422.9 422.9 422.9 Fringe benefits 13.9 3.7 3.7 3.7 22.5 12.0 12.0 12.0 15.4 14.8 14.8 14.8 Total 356.3 359.8 359.8 359.8 364.9 368.1 368.1 368.1 422.0 437.7 437.7 437.7 One-year variable remuneration 288.0 288.0 0.0 576.0 288.0 288.0 0.0 576.0 288.0 288.0 0.0 576.0 Multi-year variable remuneration 212.3 226.9 (323.8) 418.9 212.6 227.4 (324.6) 419.4 214.8 230.4 (297.6) 422.4 Bonus bank 2014 (2018 1) / 2015 (2019 1) 96.0 96.0 (358.8) 192.0 96.0 96.0 (360.0) 192.0 96.0 96.0 (336.0) 192.0 Share awards 2014 (2019 1) / 2015 (2020 1) 2 96.0 96.0 0.0 192.0 96.0 96.0 0.0 192.0 96.0 96.0 0.0 192.0 Dividend on share awards for 2013 3 20.3 0.0 0.0 0.0 20.6 0.0 0.0 0.0 22.8 0.0 0.0 0.0 Dividend on share awards for 2014 0.0 34.9 34.9 34.9 0.0 35.4 35.4 35.4 0.0 38.4 38.4 38.4 Total 856.6 874.7 36.0 1,354.7 865.5 883.5 43.5 1,363.5 924.8 956.1 140.1 1,436.1 Service cost 4 82.8 87.3 87.3 87.3 89.9 147.1 147.1 147.1 33.0 62.8 62.8 62.8 Total remuneration 939.4 962.0 123.3 1,442.0 955.4 1,030.6 190.6 1,510.6 957.8 1,018.9 202.9 1,498.9

1 Year of payment 2 Maximum value when awarded, amount paid out dependent upon the share price in the year of payment and the dividends paid until such time. 3 In the case of Mr. Althoff the dividend for 2013 refers to share awards from his work as a senior executive at Hannover Re. 4 For details of the service cost see the tables “Defined benefit commitments” and “Defined contribution commitments” on page 119.

114 Hannover Re | Annual Report 2015 German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 1 M 77 (target / minimum / maximum remuneration as nominal amounts)

Benefits granted Ulrich Wallin Sven Althoff Claude Chèvre Jürgen Gräber Chief Executive Officer Board member with divisional responsibility Board member with divisional responsibility Board member with divisional responsibility Date joined: 1 August 2014 Coordinator of worldwide property & casualty reinsurance 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 in EUR thousand (Min) (Max) (Min) (Max) (Min) (Max) (Min) (Max) Fixed remuneration 569.7 596.4 596.4 596.4 280.0 280.0 280.0 280.0 348.7 380.0 380.0 380.0 428.0 445.1 445.1 445.1 Fringe benefits 16.2 14.8 14.8 14.8 7.2 14.8 14.8 14.8 13.2 12.8 12.8 12.8 16.0 18.1 18.1 18.1 Total 585.9 611.2 611.2 611.2 287.2 294.8 294.8 294.8 361.9 392.8 392.8 392.8 444.0 463.2 463.2 463.2 One-year variable remuneration 480.0 504.0 0.0 1,008.0 252.0 252.0 0.0 504.0 297.0 342.0 0.0 684.0 360.0 360.0 0.0 720.0 Multi-year variable remuneration 356.6 398.1 (525.9) 734.1 174.2 181.3 (34.9) 349.3 210.9 252.6 (339.2) 480.6 266.8 285.9 (404.1) 525.9 Combined management report Bonus bank 2014 (2018 1) / 2015 (2019 1) 160.0 168.0 (588.0) 336.0 84.0 84.0 (48.2) 168.0 99.0 114.0 (363.8) 228.0 120.0 120.0 (450.0) 240.0 Share awards 2014 (2019 1) / 2015 (2020 1) 2 160.0 168.0 0.0 336.0 84.0 84.0 0.0 168.0 99.0 114.0 0.0 228.0 120.0 120.0 0.0 240.0 Dividend on share awards for 2013 3 36.6 0.0 0.0 0.0 6.2 0.0 0.0 0.0 12.9 0.0 0.0 0.0 26.8 0.0 0.0 0.0 Dividend on share awards for 2014 0.0 62.1 62.1 62.1 0.0 13.3 13.3 13.3 0.0 24.6 24.6 24.6 0.0 45.9 45.9 45.9 Total 1,422.5 1,513.3 85.3 2,353.3 713.4 728.1 259.9 1,148.1 869.8 987.4 53.6 1,557.4 1,070.8 1,109.1 59.1 1,709.1 Service cost 4 114.3 167.1 167.1 167.1 13.9 750.6 750.6 750.6 91.7 150.1 150.1 150.1 90.2 109.2 109.2 109.2 Total remuneration 1,536.8 1,680.4 252.4 2,520.4 727.3 1,478.7 1,010.5 1,898.7 961.5 1,137.5 203.7 1,707.5 1,161.0 1,218.3 168.3 1,818.3

Hannover Re | Annual Report 2015 115 German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 2 (cash allocations in 2014 and 2015) M 78

Allocation Ulrich Wallin Sven Althoff 1 Claude Chèvre Jürgen Gräber Chief Executive Officer Board member with divisional responsibility Board member with divisional responsibility Board member with divisional responsibility Date joined: 1 August 2014 Coordinator of worldwide property & casualty reinsurance in EUR thousand 2014 2015 2014 2015 2014 2015 2014 2015 Fixed remuneration 569.7 596.4 199.0 280.0 348.7 380.0 428.0 445.1 Fringe benefits 16.2 14.8 7.2 14.8 13.2 12.8 16.0 18.1 Total 585.9 611.2 206.2 294.8 361.9 392.8 444.0 463.2 One-year variable remuneration 2 603.0 649.2 98.0 199.3 340.5 399.0 444.8 500.4 Multi-year variable remuneration 72.7 613.4 14.6 63.6 0.0 21.6 87.6 518.7 Bonus bank 2011 0.0 233.0 0.0 0.0 0.0 21.6 0.0 163.5 ABR 2009 (2013 – 2019 3) 72.7 72.7 14.6 14.6 0.0 0.0 87.6 87.6 ABR 2010 (2015 – 2020 4) 0.0 307.7 0.0 49.0 0.0 0.0 0.0 267.6 Total 1,261.6 1,873.8 318.8 557.7 702.4 813.4 976.4 1,482.3 Service cost 5 114.3 167.1 13.9 750.6 91.7 150.1 90.2 109.2 Total remuneration 1,375.9 2,040.9 332.7 1,308.3 794.1 963.5 1,066.6 1,591.5

Allocation Dr. Klaus Miller Dr. Michael Pickel Roland Vogel Board member with divisional responsibility Board member with divisional responsibility Chief Financial Officer in EUR thousand 2014 2015 2014 2015 2014 2015 Fixed remuneration 342.4 356.1 342.4 356.1 406.6 422.9 Fringe benefits 13.9 3.7 22.5 12.0 15.4 14.8 Total 356.3 359.8 364.9 368.1 422.0 437.7 One-year variable remuneration 2 340.5 384.0 359.4 396.0 376.6 379.1 Multi-year variable remuneration 0.0 170.6 78.8 444.4 30.9 313.8 Bonus bank 2011 0.0 126.0 0.0 124.8 0.0 149.1 ABR 2009 (2013 – 2019 3) 0.0 0.0 78.8 78.8 30.9 30.9 ABR 2010 (2015 – 2020 4) 0.0 44.6 0.0 240.8 0.0 133.8 Total 696.8 914.4 803.1 1,208.5 829.5 1,130.6 Service cost 5 82.8 87.3 89.9 147.1 33.0 62.8 Total remuneration 779.6 1,001.7 893.0 1,355.6 862.5 1,193.4

1 The stated values include the remuneration of Mr. Althoff as a senior executive of Hannover Re for the period from 1 January to 31 July 2014. The service cost for 2015 includes a past service cost of EUR 704,500. 2 This refers in each case to payment of the variable remuneration for the previous year. Remuneration for seats with Group bodies that is counted towards the variable remuneration accrues in the year of occurrence. The company’s Supervisory Board only decides on the final amount paid out for the 2015 financial year after the remuneration report has been drawn up. 3 Stock appreciation rights were awarded in 2009, exercise option at the discretion of the Executive Board until 31 December 2019 in the following tranches: 40% from 2012, 60% from 2013, 80% from 2014, 100% from 2015 onwards. 4 Stock appreciation rights were awarded in 2010, exercise option at the discretion of the Executive Board until 31 December 2020 in the following tranches: 60% from 2015, 80% from 2016, 100% from 2017 onwards. 5 For details of the service cost see the tables “Defined benefit commitments” and “Defined contribution commitments” on page 119.

116 Hannover Re | Annual Report 2015 German Corporate Governance Code, Item 4.2.5 Para. 3 – Table 2 (cash allocations in 2014 and 2015) M 78

Service cost 114.3 167.1 13.9 750.6 91.7 150.1 90.2 109.2 Combined management report Total remuneration 1,375.9 2,040.9 332.7 1,308.3 794.1 963.5 1,066.6 1,591.5

Hannover Re | Annual Report 2015 117 Sideline activities of the members of the Executive Provision for surviving dependants Board If the Board member dies during the period of the service The members of the Executive Board require the approval of the contract, the surviving spouse – or alternatively the eligible Supervisory Board to take on sideline activities. This ensures children – shall be entitled to continued payment of the fixed that neither the remuneration granted nor the time required monthly salary for the month in which the Board member dies for this activity can create a conflict with their responsibilities and the six months thereafter, at most until termination of the on the Executive Board. If the sideline activities involve seats service contract. If the member of the Executive Board dies on supervisory boards or comparable control boards, these after pension payments begin, the surviving spouse and alter- are listed and published in the Annual Report of Hannover natively the dependent children shall receive continued pay- Rück SE. The remuneration received for such seats at Group ment of the retirement pension for the month of death and the companies and other board functions is deducted when cal- following six months. culating the variable bonus and shown separately in the table of total remuneration. The widow’s pension amounts to 60% of the retirement pay that the Board member received or would have received if he Retirement provision had been incapacitated for work at the time of his death. Final-salary pension commitment (appointment before 2009) An orphan’s pension shall be granted in the amount of 15% The contracts of members of the Executive Board first – in the case of full orphans 25% (final-salary pension commit- appointed prior to 2009 contain commitments to an annual ment) or 30% (contribution-based pension commitment) – of retirement pension calculated as a percentage of the pension- the retirement pay that the Board member received or would able fixed annual remuneration (defined benefit). The target have received on the day of his death if the pensionable event pension is at most 50% of the monthly fixed salary payable on had occurred owing to a permanent incapacity for work. reaching the age of 65. A non-pensionable fixed remuneration component was introduced in conjunction with the remunera- Adjustments tion structure applicable from 2011 onwards. The following parameters are used for adjustments to retirement, widow’s and orphan’s benefits: the price index for the Contribution-based pension commitment (appointment cost of living of all private households in Germany (contracts from 2009 onwards) from 2001 onwards) or the price index for the cost of living of The commitments given to members of the Executive Board four-person households of civil servants and higher-income from 2009 onwards are based on a defined contribution salaried employees (contracts from 1997 to 2000). scheme. Current pensions based on the commitments given from 2009 A Board member who has reached the age of 65 and left the onwards (defined contribution commitment) are increased company’s employment receives a life-long retirement pension. annually by at least 1% of their most recent (gross) amount. The amount of the monthly retirement pension is calculated according to the reference date age (year of the reference date Pension payments to former members of the less year of birth) and the funding contribution on the reference Executive Board date. The annual funding contribution for these contracts is The pension payments to former members of the Execu- paid by the company in the amount of a contractually specified tive Board and their surviving dependants, for whom 16 percentage of the pensionable income (fixed annual remuner- (16) pension commitments existed, totalled EUR 1.6 million ation as at the contractually specified reference date). (EUR 1.5 million) in the year under review. The projected benefit obligation of the pension commitments to former members In both contract variants (i. e. defined benefit and defined of the Executive Board amounted to altogether EUR 25.0 mil- contribution) other income received while drawing the retire- lion (EUR 28.8 million). ment pension is taken into account pro rata or in its entirety under certain circumstances (e. g. in the event of incapacity for work or termination of the service contract before reaching the age of 65).

118 Hannover Re | Annual Report 2015 Defined benefit commitments M 79

Name Financial year Attainable annual DBO 31.12. Personnel expense in EUR thousand pension (age 65) Ulrich Wallin 2015 229.1 4,532.7 167.1 2014 229.1 5,159.5 114.3 Sven Althoff 1, 2 2015 91.9 898.9 750.6 2014 30.3 370.8 13.9 Jürgen Gräber 2015 162.8 3,094.8 109.2 2014 158.5 3,493.9 90.2 Dr. Michael Pickel 2015 129.0 1,875.6 147.1 2014 125.6 2,124.2 89.9 Roland Vogel 1, 3 2015 94.0 1,524.2 62.8 2014 91.7 1,652.3 33.0 Total 2015 706.8 11,926.2 1,236.8

Total 2014 635.2 12,800.7 341.3 Combined management report

1 Mr. Althoff and Mr. Vogel were first granted a pension commitment prior to 2001 on the basis of their service to the company prior to their appointment to the Executive Board; the earned portion of the commitment from the Unterstützungskasse is therefore established as a proportion (in the ratio [currently attained service years since entry] / [attainable service years from entry to exit age]) of the final benefit. Measurement under IFRS consequently uses the defined benefit method. The values shown include the entitlements prior to appointment to the Executive Board, which in accordance with a resolution of the company’s Supervisory Board shall remain unaffected by the pension commitment as a member of the Executive Board. 2 The first increased contribution was paid for Mr. Althoff in 2015 based on his appointment to the Executive Board in an amount of EUR 42,100 (25% of the pensionable income). The personnel expenditure in 2015 includes a past service cost of EUR 704,500. The values shown for 2014 refer to his entitlements based on the remuneration prior to appointment to the Executive Board (1 August 2014). The guaranteed interest rate of his commitment is 3.25%. 3 An annual premium of EUR 103,700 (25% of the pensionable income) was paid for Mr. Vogel for 2015. The guaranteed interest rate of his commitment is 3.25%.

Defined contribution commitments M 80

Name Financial year Annual funding Attainable annual Premium in EUR thousand contribution 1 pension (age 65) Claude Chèvre 2 2015 39.5% 131.1 150.1 2014 25% to October 2014 117.8 91.7 39.5% from November 2014 Dr. Klaus Miller 2 2015 25% 53.0 87.3 2014 25% 51.4 82.8 Total 2015 184.1 237.4 Total 2014 169.2 174.5

1 Percentage of pensionable income (fixed annual remuneration as at the contractually specified reference date) 2 Guaranteed interest rate 2.25%

Remuneration of the Supervisory Board variable remuneration measured according to the average earnings per share (EPS) of the company over the past three finan- The remuneration of the Supervisory Board is determined by cial years preceding the Annual General Meeting at which the the Annual General Meeting of Hannover Rück SE and regu- actions of the Supervisory Board for the last of these three years lated by the Articles of Association. are ratified. The variable remuneration amounts to EUR 330 for each EUR 0.10 average earnings per share (EPS) of the In accordance with § 14 of the Articles of Association as company. The measurement of this performance-based remu- amended on 18 July 2013 and the resolution of the Annual neration component according to the average earnings per General Meeting on 7 May 2013, the members of the Supervi- share of the last three financial years ensures that the variable sory Board receive fixed annual remuneration of EUR 30,000 remuneration is geared to sustainable corporate development. per member in addition to reimbursement of their expenses. The variable remuneration is limited to an annual maximum of Furthermore, each member of the Supervisory Board receives EUR 30,000. The Chairman of the Supervisory Board receives

Hannover Re | Annual Report 2015 119 twice the aforementioned remuneration amounts and the Dep- Members who have only belonged to the Supervisory Board uty Chairman of the Supervisory Board receives one-and-a-half or one of its Committees for part of the financial year receive times the said amounts. the remuneration pro rata temporis.

In addition, the members of the Finance and Audit Commit- All the members of the Supervisory Board receive an attend- tee formed by the Supervisory Board receive remuneration of ance allowance of EUR 1,000 for their participation in each EUR 15,000 for their committee work and the members of the meeting of the Supervisory Board and the Committees in addi- Standing Committee formed by the Supervisory Board receive tion to the aforementioned remuneration. If a meeting of the remuneration of EUR 7,500. In this case, too, the Chairman Supervisory Board and one or more committee meetings fall of the Committee receives twice and the Deputy Chairman on the same day, the attendance allowance for this day is only one-and-a-half times the stated amounts. No remuneration is paid once in total. envisaged for the Nomination Committee.

Individual remuneration received by the members of the Supervisory Board M 81

Name Function Type of remuneration 2015 2014

in EUR thousand 1 Herbert K. Haas 2 Chairman of the Fixed remuneration 100.0 100.0 • Supervisory Board Variable remuneration 82.7 84.9 • Standing Committee • Finance and Audit Committee Remuneration for committee work 85.0 85.0 • Nomination Committee Attendance allowances 13.0 11.0 280.7 280.9 Dr. Klaus Sturany Deputy Chairman of the Fixed remuneration 45.0 45.0 Supervisory Board Variable remuneration 40.1 40.1 Member of the Standing Committee Remuneration for committee work 7.5 7.5 Attendance allowances 6.0 5.0 98.6 97.6 Wolf-Dieter Baumgartl 2 Member of the Fixed remuneration 50.0 50.0 • Supervisory Board Variable remuneration 41.4 42.3 • Standing Committee • Finance and Audit Committee Remuneration for committee work 22.5 22.5 • Nomination Committee Attendance allowances 11.0 11.0 124.9 125.8 Frauke Heitmüller 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0 Variable remuneration 26.7 26.6 Remuneration for committee work – – Attendance allowances 4.0 4.0 60.7 60.6 Otto Müller 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0 Variable remuneration 26.7 26.6 Remuneration for committee work – – Attendance allowances 4.0 4.0 60.7 60.6 Dr. Andrea Pollak Member of the Fixed remuneration 30.0 30.0 • Supervisory Board Variable remuneration 26.7 26.6 • Nomination Committee Remuneration for committee work – – Attendance allowances 4.0 4.0 60.7 60.6 Dr. Immo Querner 2 Member of the Supervisory Board Fixed remuneration 50.0 50.0 Variable remuneration 41.4 41.7 Remuneration for committee work 10.0 10.0 Attendance allowances 7.0 7.0 108.4 108.7

120 Hannover Re | Annual Report 2015 Dr. Erhard Schipporeit Member of the Fixed remuneration 30.0 30.0 • Supervisory Board Variable remuneration 26.7 27.1 • Finance and Audit Committee Remuneration for committee work 15.0 15.0 Attendance allowances 7.0 6.0 78.7 78.1 Maike Sielaff 3 Member of the Supervisory Board Fixed remuneration 30.0 30.0 Variable remuneration 26.7 24.0 Remuneration for committee work – – Attendance allowances 4.0 4.0 60.7 58.0 Gert Wächtler 4 Member of the Supervisory Board Fixed remuneration – – (until 19 March 2013) Variable remuneration – 2.5 Remuneration for committee work – – Attendance allowances – –

– 2.5 Combined management report Total 934.1 933.4

1 Amounts excluding reimbursed VAT 2 Including supervisory board remuneration and remuneration for committee work as well as advisory board remuneration received from entities affiliated with the company 3 Employee representatives 4 Former employee representative

The individualised presentation of the remuneration shows the Securities transactions and sharehold- expense charged to the financial year in question. Since the ings (directors’ dealings) remuneration for a financial year becomes due at the end of the Annual General Meeting that ratifies the acts of the Super- Dealings in shares, options and derivatives of Hannover Rück visory Board for the financial year, the relevant reserve allo- SE effected by members of the Executive Board or Supervi- cations for the variable remuneration are recognised allowing sory Board of Hannover Re or by other persons with manage- for any fractional amounts. Value-added tax payable upon the rial functions who regularly have access to insider information remuneration is reimbursed by the company. concerning the company and who are authorised to take major business decisions – as well as such dealings conducted by In the year under review no payments or benefits were granted certain persons closely related to the aforementioned individ- to members of the Supervisory Board in return for services uals – in excess of EUR 5,000 are to be reported pursuant to provided individually outside the committee work described § 15a Securities Trading Act (WpHG). No such reportable trans- above, including for example consulting or mediation services, actions took place in the 2015 financial year. with the exception of the remuneration paid to employee representatives on the basis of their employment contracts. Members of the Supervisory Board and Executive Board of Han- nover Rück SE as well as their spouses or registered partners and first-degree relatives hold less than 1.0% of the issued Loans to members of the management shares. The total holding as at 31 December 2015 amounted to boards and contingent liabilities 0.004% (0.004%) of the issued shares, i. e. 4,585 (4,549) shares.

In order to avoid potential conflicts of interest, Hannover Rück SE or its subsidiaries may only grant loans to members of the Executive Board or Supervisory Board or their dependants with the approval of the Supervisory Board.

In 2015 no loan relationships existed with members of the Executive Board or Supervisory Board of Hannover Rück SE, nor did the company enter into any contingent liabilities for members of the management boards.

Hannover Re | Annual Report 2015 121 Remuneration of staff and senior Measurement of variable remuneration for senior executives executives The measurement of the variable remuneration is based on Structure and system three elements: Group net income, divisional targets and indi- The remuneration scheme for senior executives below the vidual targets. The weighting of the elements is dependent Executive Board (management levels 2 and 3) consists of a upon whether responsibility is carried in a treaty / regional fixed annual salary and a system of variable remuneration. department or in a service department. In the treaty / regional This is comprised of a short-term variable remuneration com- departments the Group net income is weighted at 20%, the ponent, the annual cash bonus, and a long-term share-based divisional targets at 40% and the individual targets also at remuneration component, the Share Award Plan. This varia- 40%. In the service departments the Group net income carries ble remuneration has been uniformly applied worldwide since a 40% weighting, while the individual targets account for 60%. 1 January 2012 to all Group senior executives (i. e. Manag- Agreements on divisional targets and individual targets as well ing Directors, Directors and General Managers). It satisfies as on their degree of goal attainment are arrived at as part of the requirements of the Regulation on the Supervisory Law the Management by Objectives (MbO) process. Requirements for Remuneration Schemes in the Insurance Sec- tor (VersVergV), which entered into force on 13 October 2010, The Group net income is measured by the three-year average inasmuch as – in its basic principles and parameters – it meets return on equity (RoE) of the Hannover Re Group above the the special requirements of § 4 VersVergV and is appropri- risk-free interest rate. Goal attainment is calculated as follows: ately realised according to the various management levels. As for each individual financial year of the last three financial part of the reorientation of the remuneration system for senior years it is calculated by how many percentage points the RoE executives the Share Award Plan of the Executive Board was of the Hannover Re Group exceeds the risk-free interest rate. consciously extended to include management levels 2 and 3. The average of these three differences determines the three- Given that at the same time the stock appreciation rights plan year average RoE above the risk-free interest rate. The risk-free for senior executives was cancelled with effect from the 2012 interest rate is the average market interest rate over the past allocation year, this means that a uniform share-based remu- five years for 10-year German government bonds. neration component has been maintained for the Executive Board and senior executives alike. If the three-year average RoE above the risk-free interest rate reaches the expected minimum return on equity of 750 basis Members of staff on the levels of Chief Manager, Senior Man- points, goal attainment stands at 85%. Goal attainment of ager and Manager are also able to participate in a variable 100% is recorded at 882 basis points. The maximum possi- remuneration system through the Group Performance Bonus ble goal attainment is 200%. A lower limit is placed on goal (GPB). The Group Performance Bonus (GPB) is a remunera- attainment of -50% (penalty) for management level 2 (Man- tion model launched in 2004 that is linked to the success of the aging Director) and 0% for management level 3 (Director and company. This tool is geared to the minimum return on equity General Manager). of 750 basis points above the risk-free interest rate and the return on equity actually generated. For those participating in The measurement of the divisional targets – which in the case the GPB 14.15 monthly salary payments are guaranteed; a max- of the treaty / regional departments account for 40% of overall imum of 16.7 salary payments is attainable. Since its launch goal attainment – is geared to the actual value created. The the maximum amount of the GPB was paid out in 2006, 2007, Intrinsic Value Creation (IVC) of the division encompassing the 2009, 2010, 2012, 2013 and 2014. relevant area of responsibility is therefore used as a one-year measurement basis. Negative performance contributions are The group of participants and the total number of eligible par- excluded here – the minimum possible goal attainment is 0%. ticipants in the variable remuneration systems of Hannover Re The maximum possible goal attainment is limited to 150%. are set out in the following table.

Group of participants and total number of eligible participants in variable remuneration systems M 82 Valid: 31 December 2015

Participants Variable remuneration Number of eligible participants in the variable system remuneration system Managing Director Management level 2 Cash bonus and Share Hannover Re Group Award Plan All 160 Group senior executives worldwide Director Management level 3 receive a cash bonus upon corresponding goal General Manager attainment and participate in the Share Award Plan. Chief Manager Group Performance Home Office Hannover Bonus (GPB) 699 staff (excl. seconded employees) out of the Senior Manager altogether 1,337 at Hannover Home Office Manager (incl. 94 senior executives) are GPB-eligible.

122 Hannover Re | Annual Report 2015 Attainment of the agreed IVC results in goal attainment of Allocation and payment of share awards to senior 100%. Outperformance of the divisional targets, i. e. a degree executives of goal attainment in excess of 100%, requires at least the The total number of share awards allocated is determined agreement and attainment of a positive IVC. Furthermore, according to the value per share of Hannover Re. This value is a degree of goal attainment in excess of 100% should be arrived at from the average of the closing prices of the shares geared to a real comparison of planned IVC with actual IVC. in a period extending from 20 trading days before to 10 trad- A maximum degree of goal attainment of 150% is conditional ing days after the meeting of the Supervisory Board at which upon attainment of an excellent positive IVC and implies that the consolidated financial statement is approved. The number the actual IVC of the division is significantly in excess of the of share awards is established by dividing the specified por- planned IVC. tion of the total bonus (40% or 35%) by the value per share, rounded up to the next full share. In view of the fact that the Excess Return on Capital Allocated (xRoCA) is even more suitable for comparisons between units Following expiry of a vesting period of four years the value of of differing size, it was decided that from 2016 onwards the one Hannover Re share calculated at the disbursement date xRoCA will be used as the measurement basis instead of the is paid out for each share award. The value of the Hannover IVC. The xRoCA describes the IVC in relation to the allocated Re share is again determined from the average of the closing capital and shows the relative excess return generated above prices of the shares in a period from 20 trading days before to Combined management report and beyond the weighted cost of capital. 10 trading days after the meeting of the Supervisory Board that approves the consolidated financial statement. In addition, a Individual targets are agreed and measured for a period of one sum in the amount of the dividend is paid out for each share year. The degree of goal attainment is between 0% and 100%. award, insofar as dividends were distributed to shareholders. The level of the dividend payment is the sum total of all divi- Amount and payment of variable remuneration for dends per share paid out during the period of the share awards senior executives multiplied by the number of share awards. The overall degree of goal attainment determines the amount of variable remuneration including share awards. On management In the case of the allocation and payment of share awards to level 2 (Managing Director) 60% of the variable remuneration participants in the Share Award Plan who are located abroad, is paid out annually in cash and 40% is granted in the form of the rate of exchange used to convert the average share price share awards. On management level 3 (Director and General is the average of the relevant exchange rate in a period from Manager) the variable remuneration is split into 65% cash 20 trading days before to 10 trading days after the meeting of payment and 35% granted as share awards. the Supervisory Board that approves the consolidated financial statement. For payment of the dividend to participants in the On management level 3 (Director and General Manager) the Share Award Plan who are located abroad, the rate of exchange minimum variable remuneration amounts to EUR 0 on the used to convert the dividend per share is the average of the rel- premise that the degree of attainment for all goals is 0%. For evant exchange rate in a period from 20 trading days before to management level 2 (Managing Director) in treaty / regional 10 trading days after the Annual General Meeting that approves departments the minimum limit for the variable remuneration the dividend payment for the financial year just ended. is set at -10% if the degree of goal attainment for Group net income is -50% while at the same time goal attainment of The cash bonus for the 2014 financial year was paid out in June 0% is determined for the divisional targets and individual tar- 2015. The share awards for the 2014 financial year were also gets. For management level 2 (Managing Director) in service allocated in June 2015; they will be paid out in the spring of departments -20% of the variable remuneration is possible as 2019 including dividends paid for the 2014, 2015, 2016 and the lower limit, if the degree of goal attainment for Group net 2017 financial years. income is -50% and at the same time goal attainment of 0% is determined for the individual targets.

In view of the fact that outperformance of up to 200% is possible for Group net income and up to 150% for divisional targets, a maximum total degree of goal attainment of 140% can be attained in both treaty / regional departments and service departments. Given outperformance of all targets, a maximum of 140% of the variable remuneration can therefore be attained on management levels 2 and 3.

Hannover Re | Annual Report 2015 123 Always …

… q uick

Keeping the flows of goods moving The 2011 floods in Thailand caused considerably heavier losses than the insurance industry had anticipated. Many railway lines were blocked, while main highways and country roads were impassable. Along with the direct losses incurred by the Thai economy, supply disruptions impacted the worldwide computer and automobile industries. This market consequently experienced capacity shortages on the re insurance side. Hannover Re was quick to respond, vigorously expanding its services for primary insurers in Thailand within a short space of time. As a result, we wrote substantially more business and helped to get the infrastructure and industrial plants back up and running.

124 Hannover Re | Annual Report 2015 Ratchadamri Road, Bangkok, Thailand

Hannover Re | Annual Report 2015 125 Outlook

Forecast • Solid prospects for 2016 in property and casualty reinsurance despite protracted soft market phase • Further growth and increased profitability in life and health reinsurance • Return on investment target of 2.9% for assets under own management • Group net income expected in the order of EUR 950 million

Economic development The risks to the economy seen in recent years still exist: on the political front, the development of flashpoints in the Near Global economy and Middle East is especially hard to foresee. The expansion Economic experts expect 2016 to bring a positive continuation of crisis zones or an upsurge in terrorist activity could unset- of cyclical momentum on a slightly higher level: in its year- tle markets and undermine the anticipated global economic end forecast the Kiel Institute for the World Economy antici- growth. Furthermore, geopolitically induced turmoil on finan- pates growth of 3.4% for the global economy in 2016, which cial markets cannot be ruled out: interest rate hikes in the is 0.3 percentage points stronger than in 2015. United States, for example, could have increasingly negative repercussions on the world economy, especially because The upturn in the developed economies will generally be numerous countries are still in the throes of a restructuring sustained: monetary policy, which for the most part remains process. As additional factors, movements in the oil price and expansionary, gradually rising wages and the low price of the pace of growth in China are likely to impact the markets. oil are supporting progressive deleveraging processes in the private sector and boosting business activity. Expansion in emerging markets will initially continue to be curtailed by low commodity prices and structural problems, although the state of the economy in this group of countries is expected to bounce back little by little.

Growth in gross domestic product (GDP) M 83

2015 2015 2016 (forecast from (provisional (forecast) in % previous year) calculation) Economic areas World economy 3.7 3.1 3.4 Eurozone 1.2 1.5 1.7 Selected countries United States 3.2 2.5 2.8 China 7.0 6.8 6.5 India 6.5 7.2 7.2 Japan 0.8 0.7 1.0 Germany 1.7 1.8 2.2

Source: Kiel Institute for the World Economy

United States be sustained. Consumer spending is also continuing to trend Output in the United States is set to rise by 2.8% in 2016. clearly higher. Further improvement on the labour market will With sales prospects looking brighter at home and abroad, bring about progressive wage growth. the increase in corporate investment, in particular, will likely

126 Hannover Re | Annual Report 2015 Europe consumption. Nevertheless, they will likely result in the pace of The Eurozone economy is gradually picking up momentum. expansion easing only slightly in the forecast period. Growth The moderate revival in the winter months will in all likelihood of 6.5% is anticipated for China in 2016, with a modestly slow- be sustained for the entirety of 2016. Nevertheless, the struc- ing tendency. tural problems affecting parts of the currency area will stub- bornly persist. Growth is expected to come in slightly higher Capital markets than in the previous year at 1.7%. Despite trending upwards, The decision of the European Central Bank to stand by its low the increase in consumer prices in the Eurozone will continue interest rate policy and purchase government bonds over an to be very low at 1.0%. The unemployment rate is trending extended timeframe is intended to protect the Eurozone against lower: it is forecast to nudge modestly lower again to 10.4%. the threat of deflation. The US Federal Reserve, by contrast, The United Kingdom should generate growth almost on a par moved away from its expansionary interest rate policy and set with the previous year at 2.3%. in motion a cycle of rate hikes for the first time in almost a decade. This should be reflected in a continued strong US dollar. Germany The next steps taken by the Federal Reserve and the signals After the growth in total output had slowed somewhat of late, that it sends out will come under particularly close scrutiny there are signs of an appreciably accelerated pace of expansion throughout 2016. The US central bank finds itself compelled in 2016. Particularly in the service sector, growth expectations to walk a fine line between the potential need for additional Combined management report are higher than at any point since the reunification boom. The interest rate moves and the risk of adversely affecting the flow experts at the Kiel Institute for the World Economy anticipate a of money into other countries and weakening the US economy growth rate of 2.2% for 2016 with a modestly rising tendency. through precisely these measures. Growth will continue to be driven primarily by stronger private consumption, which will be fed by sharply higher disposable International bond markets will again be shaped by below- incomes of private households. Corporate investment will see average and increasingly divergent interest rate levels in 2016. further expansion in an extremely favourable financing climate. In the relevant currency areas for our company we anticipate Exporters have enjoyed a surge in competitiveness with the flatter yield curves. With respect to government bonds with devaluation of the euro. This may lead to stronger exports and higher risk premiums issued by countries of the European stimulate capital investment as the expansion picks up pace. A Monetary Union that have been the focus of so much atten- new factor affecting the economy is the high level of refugee tion of late, the situation should continue to stabilise. Generally migration, which will give an added boost to spending. The speaking, the increased volatility observed on the capital mar- restraining influence of foreign markets that has been felt of ket since the summer of 2015 is not expected to diminish. The late will fade, giving way to increasingly stimulating effects on effects of currency and oil price movements should therefore the economy. Growth momentum is picking up in the countries be all the more pronounced, with more risks than opportuni- that are Germany’s major customers. ties anticipated at this point in time for the world economy – also with an eye to geopolitical concerns. The consolidation In the assessment of the Kiel Institute for the World Econ- of public finances in the industrial nations and the advanced omy, employment will continue to trend higher, accompanied phase of the credit cycle in the United States will continue to by appreciable wage growth. The fall in unemployment will, preoccupy the economic environment; they may, however, be however, come to a halt as a consequence of the considerable more than offset by resurgent private consumption. In view influx of refugees. The jobless rate is expected to remain at of the existing uncertainties, broad diversification within the around 6.3%. investment portfolio will therefore continue to be of considerable importance in 2016. China, India, Japan Developments in emerging economies will continue to be ham- Insurance industry pered for the time being by low commodity prices and struc- According to general industry assessments, the international tural difficulties, although business activity in these markets insurance industry will find itself operating in an environment too should gradually stabilise. Overall, the contribution made in 2016 that is comparable with the previous year. Two key by these countries to global growth will fall short of the high issues will continue to be the low Interest rate policy and impli- levels seen in past years. The room for manoeuvre in fiscal pol- cations of the implementation of Solvency II or similar regula- icy remains very limited in many emerging markets because tory regimes in many major markets around the world at the monetary policy there is geared more towards stabilising the start of this year. They are helping to ensure that the insur- currency than stimulating the economy. The government in ance industry remains heavily focused on efficiency, shoring China implemented numerous measures last year to prop up up its profitability and innovating on both the product and demand. In the assessment of economic experts, however, service side. Irrespective of the challenges that it is facing, these steps will not suffice to bring about the desired structural the insurance sector should still remain on a stable course in shift towards a financially and environmentally more sustaina- the current year. ble economy, not to mention one geared more towards private

Hannover Re | Annual Report 2015 127 Along with Europe (Solvency II) and China (C-ROSS), South cycle management combined with rigorous underwriting dis- Africa will also be adopting a risk-based solvency system (Sol- cipline and trusts in a broadly diversified portfolio of high-qual- vency Assessment and Management) during the year or at the ity existing business, complemented by opportunities that may beginning of 2017 at the latest. arise in niche and specialty lines.

The (re)insurance market had already witnessed various nota- Property & Casualty reinsurance: M 84 ble mergers and acquisitions in 2015. This trend is likely to Forecast development for 2016 be not only sustained but even accentuated in 2016, given Volume 1 Profitability 2 that increased competition is making it especially difficult for smaller (re)insurers to generate their target margins. What is Target markets 3 more, it is evident that primary insurers and contracting par- North America + ties are tending to turn to highly profitable reinsurers with Continental Europe 3 + / – an above-average rating who can fall back on strong balance Specialty lines worldwide sheets and a positive cash flow. This has been accompanied Marine + by rising demand for partners with a diversified range of prod- Aviation – ucts and services. Credit, surety and political risks + Generating growth in what continues to be a highly competitive UK, Ireland, London market and environment will doubtless remain a real challenge in 2016. direct business + / – Furthermore, industry experts anticipate stable or slightly Facultative reinsurance + lower premiums. If 2016 should again pass off without large Global reinsurance losses from natural catastrophes or if reinsurers post adequate Worldwide treaty reinsurance + returns on equity from the perspective of shareholders, the soft Catastrophe XL (Cat XL) – market phase is likely to continue. Structured reinsurance and insurance-linked securities + / –

Property & Casualty reinsurance 1 In EUR 2 ++ = significantly above the cost of capital Overview + = above the cost of capital + / – = on a par with the cost of capital After four years in a row of low major losses and good results – = below the cost of capital for all market players, property and casualty reinsurance is once 3 All lines with the exception of those reported separately again seeing intense competition in the current financial year. This is being driven above all by the continued abundant over- Expectations for the development of our property and casualty supply of reinsurance capacity attributable to the fact that rein- reinsurance business are described in greater detail below. surers have been able to boost their capital positions – on the back of minimal large loss expenditure – and also because cap- Target markets ital has flowed in from the market for catastrophe bonds (ILS). North America In North American primary insurance, where rate increases These factors also shaped the treaty renewals as at 1 January have been observed since 2011, softening is likely to emerge 2016, the date when some 65% of our property and casualty in the market in 2016 – and this could increasingly lead to reinsurance portfolio (excluding facultative business and struc- rate reductions for major risks. The absence of sizeable claims tured reinsurance) was renegotiated. Despite sometimes appre- expenditure on natural disasters and individual risks continues ciable price erosion, we were broadly satisfied with the outcome to make itself felt on the reinsurance side and will sustain the of the renewals – even though the rate quality of the renewed trend towards rate erosion in property and – to a lesser extent – portfolio was somewhat lower than in the previous year. Virtu- casualty business, albeit in a more muted form. Mergers and ally unchanged conditions and stronger demand for multi-year acquisitions in the primary market will lead to a shakeup in covers are likely indications that the current soft market phase reinsurance purchasing over the long term; in the short term, is bottoming out. however, we see more opportunities than risks, which Han- nover Re will be able to leverage thanks to its long-standing The latest round of renewals showed that financially robust close and established customer relationships. reinsurers such as Hannover Re are more highly sought-after by cedants. Based on our excellent ratings, our long-standing customer relationships and our profit-oriented underwriting policy, we are in a good position to adapt to the soft market conditions. Hannover Re continues to practise its systematic

128 Hannover Re | Annual Report 2015 The latest round of renewals offered increasing indications of capital relief for the Solvency II requirements that have entered a bottoming out in both the property and casualty lines. We into force are enjoying a surge in demand. We were neverthe- are adhering to our strategy of a margin-oriented underwrit- less selective in our underwriting approach with an eye to our ing policy, even if this compels us to forego premium growth. minimum margin requirements. Nevertheless, in view of our long-standing and robust customer relationships, we expect to maintain our presence even in the All in all, we booked a moderate premium contraction in the soft market. Overall, then, we were satisfied with the outcome treaty renewals for Continental European markets. of the renewals as at 1 January 2016. The rate erosion has slowed somewhat. Modest rate reductions were recorded in Specialty lines worldwide non-proportional property business, especially under profitable Marine loss-free programmes. On the other hand, premium increases In marine reinsurance we expect to see a sharp decline in rates were booked in all three subsectors of US liability business for the 2016 financial year despite the sizeable number of large (standard, special and professional liability) – while conditions losses. Demand for primary insurance in the area of offshore under proportional treaties remained stable. All in all, the pre- energy risks is soft on the back of low oil prices. Combined mium volume for the North American portfolio renewed as at with high capacity and fierce competition throughout the entire 1 January climbed by around 9% – in part due to the expan- marine insurance market, our customers have booked reduced sion of customer relationships. As things currently stand, we premium income. When it comes to our own portfolio, we antic- Combined management report expect to see further intensification of competition in this seg- ipate a lower premium volume overall in 2016. ment in the treaty renewals as at 1 June and 1 July 2016 – the time of year when catastrophe XL covers, in particular, are Aviation renegotiated. On the whole, our North American business is The significant major losses incurred in aviation reinsurance expected to deliver slightly higher premium volume in the cur- in 2014 and 2015 have failed to bring about long-term stabili- rent financial year. sation of rates. Although rising passenger numbers and fleet values are creating stronger demand for reinsurance in the Continental Europe original market, we anticipate a continued abundant oversup- In Germany, the largest single market within our Continental ply of insurance capacities and sharply lower rates. With this Europe segment, Hannover Re was able to further cement its in mind, we are scaling back our involvement and our market excellent position. Hannover Re is active in this market through share in the aviation sector, and we expect to book a sharp its subsidiary E+S Rück. Here, too, competition nevertheless contraction in premium volume. remained keen. The increased retentions carried by larger clients were a particularly significant factor in the 1 January Credit, surety and political risks renewals, when virtually our entire portfolio was renegotiated. The premium volume in the area of credit, surety and politi- In motor business, the most important single line, we expect cal risks is expected to remain virtually unchanged in 2016. original rates to rise and have increased our shares accordingly. Slowing growth in China and the moderate rise in loss ratios Moderate improvements were also possible in homeowners in emerging markets will impact our business. While the risk comprehensive insurance. The quality of results in non-propor- appetite of primary insurers has grown steadily in recent years, tional motor liability business will continue to improve due to we do not now anticipate any further increases in the premium better conditions as a consequence of higher priorities. Unfor- that they retain for own account. Overall, leaving aside cer- tunately, this will also entail accepting a decrease in premium. tain exceptions principally in the area of political risks business, it is our expectation that conditions will come under only Fierce competition and the large number of basic losses put slight pressure in 2016. Against this backdrop, the segment is adequate results in industrial fire insurance out of reach. With expected to deliver a moderately improved profit contribution. this in mind, we continued to write our business here very selectively. Our total portfolio in the domestic German mar- United Kingdom, London market and direct business ket is expected to show a slightly reduced premium volume. In the face of protracted competition we expect to see declining rates for our reinsurance business in this area in 2016, In the other markets of Continental Europe the picture was especially in the property lines. In non-proportional UK motor a mixed one: the expansion of existing customer accounts in business, on the other hand, we are benefiting from stable rates France enabled us to offset the pressure on prices in loss-free and growth in the underlying business. Further risk selection programmes and the effect of discontinued treaties. In North- and increased diversification should serve to boost the port- ern European countries we were able to maintain our position folio quality of our direct business and deliver stable earnings as one of the preferred reinsurance providers. The markets of in 2016. In the treaty renewals as at 1 January 2016 we largely Southern and Eastern Europe were considerably more compet- preserved our portfolio thanks to our established customer rela- itive. Broadly speaking, though, we still consider reinsurance tionships, while we reduced shares in treaties that had come prices here to be commensurate with the risks. Most notably, under heavier pressure. For the current year we expect to book proportional and non-proportional treaties offering sufficient a stable or slightly higher premium volume.

Hannover Re | Annual Report 2015 129 Facultative reinsurance In Australia and New Zealand we shall continue to systemat- As is also the case in obligatory reinsurance, the soft market ically leverage our strategically important local presence and phase prevailing in facultative reinsurance is likely to con- the company’s financial strength in order to further expand tinue in 2016. A revival in offshore energy business is not to our customer relationships in the region and hence moderately be expected in view of reduced investment in the construction boost our premium volume. We shall devote special strategic of drilling rigs due to the low oil price. Nevertheless, by taking attention here to the provision of holistic customer care and a selective approach we also see attractive business opportu- the cultivation of niche business. nities. For example, we anticipate stronger demand in areas such as covers for renewables and cyber risks. An increased In South Africa a risk-based solvency system known as SAM focus on US casualty business should also open up new pros- (Solvency Assessment and Management) is to be implemented pects. In addition, thanks to our very good rating we should for the insurance industry during 2016 or 2017. We expect the continue to profit from the pooling of reinsurance cessions premium for our reinsurance portfolio and specialty business on the part of large primary insurance groups. Our portfolio to contract in 2016, in part owing to exchange rate effects. of facultative risks is expected to deliver a slightly reduced premium volume with continued healthy profitability in the The market and the placement of reinsurance cessions in Latin current financial year. America are just as fiercely competitive as in other regions. Thanks to our exceptionally good position in this region and Global reinsurance our outstanding financial strength, we expect to achieve prices Worldwide treaty reinsurance that are commensurate with the risks in the main renewal sea- The Asia-Pacific markets continue to rank as growth markets. son as at 1 July 2016 – something which we were also able to Along with sustained rising demand for insurance products do in the 1 January renewals. Despite the difficult state of the among the expanding middle classes of many emerging mar- market we succeeded in holding our portfolio stable thanks to kets, regulatory changes – above all in China and India – are our focus on Latin America as a whole. In Argentina – one of also having favourable implications for Hannover Re’s posi- the largest markets in Latin America – we anticipate a more tioning. In certain Asian countries, on the other hand, moves business-friendly policy after the change of government at the to reduce the outflow of reinsurance premiums into foreign end of 2015. To this extent, we remain confident of generating markets are having adverse impacts. further profitable growth for our portfolio from Latin American markets in the current financial year by adhering to our selec- The Japanese portfolio of the Hannover Re Group is expected tive underwriting policy. to see slight erosion of the premium income but continued satisfactory profitability. Our positioning in this important market Hannover Re expects demand to continue rising for coverage is nevertheless very good, giving us a range of excellent options of agricultural risks. The increasing need for agricultural com- for responding to future market changes. modities and foodstuffs as well as the growing prevalence of extreme weather events are generating stronger demand for Our reinsurance business in China is expected to deliver reinsurance covers, particularly in emerging and developing another significant surge in premium growth. The regulatory markets. In addition, the decision was taken at the Paris Cli- changes ushered in with the adoption of the C-ROSS solvency mate Conference in December 2015 to insure a further 400 mil- regime on 1 January 2016, Hannover Re’s local presence lion people in poor and at-risk nations against the effects of and our strategy of building stronger customer relationships climate change by the year 2020. In this regard, we see further with a diversified business volume will support the growth of growth potential for index-linked products among direct and the portfolio. indirect insurance concepts in emerging and developing countries. Hannover Re therefore expects its premium to come in The region of South and Southeast Asia should deliver con- higher for the current financial year. tinued growth, although it will be somewhat softer than in the previous year. Consequently, our portfolio here should show a We expect to write further profitable business on the level of further rise in premium income due to special volume-oriented the previous year for our retakaful portfolio in the current and product initiatives that have already been launched. Rates financial year. for these initiatives are expected to be adequate.

130 Hannover Re | Annual Report 2015 Catastrophe XL (Cat XL) Life & Health reinsurance An oversupply of reinsurance capacity continues to be the hallmark of natural catastrophe business. The inflow of capital from In the Life & Health reinsurance business group we are a glob- alternative and ILS markets slowed over the course of the year. ally operating and professional partner for our customers. We The current soft market phase will only come to an end when conduct profitable activities in international and highly compet- the majority of market players reach a level of profitability that itive markets and, as a global reinsurer, we strive for sustaina- is insufficient – whether through high loss expenditures, inad- ble success. In so doing, we do not restrict ourselves solely to equate reserving levels or influencing effects from the capital our core business of offering our customers reinsurance solu- market. In the 1 January 2016 treaty renewals rates declined tions, but rather we also tackle the manifold other challenges by around 8% as natural catastrophe losses remained below posed by the life and health reinsurance market. expectations. For the full financial year we therefore anticipate reduced premium income. Life & Health reinsurance: M 85 Forecast development for 2016 Structured reinsurance and insurance-linked securities Volume 1 Profitability 2 With the implementation of risk-based models for calculating solvency requirements not only within but also outside the Euro- Financial Solutions + + pean Union, we anticipate good business opportunities in our Risk Solutions Combined management report structured reinsurance business. The key driver here is the Longevity + / – growing integration of reinsurance into insurers’ risk manage- Mortality + ment as a means of offsetting the effects of the increasingly Morbidity + / – exacting capital requirements placed upon them. The adoption of C-ROSS in China means that primary insurers require 1 In EUR less capital for motor business (70% of property and casualty 2 + + = significantly above the cost of capital reinsurance business). Demand for quota share reinsurance + = above the cost of capital arrangements offering solvency relief may therefore diminish. + / – = on a par with the cost of capital – = below the cost of capital

In the area of insurance-linked securities (ILS) we expect to see steadily growing demand. Investors are seeking a low cor- Developments on capital markets play a crucial role and will relation with other financial investments and hence the diversi- once again influence our business in the current year. The fication that this brings. What is more, the market for insurance prevailing low interest rate environment will impact new busi- risks is perceived by investors as relatively attractive compared ness and the profitability of the existing portfolio in 2016, as to other investments. We are responding to this market situ- it did in 2015. Especially in Europe, this situation is exerting a ation with a strong emphasis on service, offering individually particularly dampening effect on demand for traditional sav- tailored products – from collateralised reinsurance to catastro- ings products with interest rate guarantees. It is our expecta- phe bonds – and extending our range of services for life reinsur- tion that attention in these markets will increasingly focus on ance risks. Over the coming years we expect our ILS activities risk-oriented and unit-linked solutions. There are also signs of to deliver a positive and consistently rising profit contribution. further consolidation, principally affecting traditional life insurance business. It is evident that primary insurers are switching In keeping with our strategy of “Long-term success in a com- their new business with conventional life insurance products to petitive business”, we have adjusted to this soft market phase innovative new concepts with a variable return. With a view to in property and casualty reinsurance. With an expense ratio staying focused on writing new business, in-force portfolios are well below the average of our competitors and reserves that being passed on in block transactions to professional consolida- are calculated on a highly conservative basis, we are in a position platforms. With the implementation of Solvency II effective tion – subject to normal major loss expenditure – to achieve 1 January 2016, we anticipate rising demand – especially in good results. This is further supported by our good diversifi- Germany – for innovative business possibilities and, in particu- cation across regions and lines of business. lar, for financially oriented reinsurance solutions that help to provide solvency relief for our primary insurance customers.

Hannover Re | Annual Report 2015 131 In South Africa and China, too, local insurance companies are Investments facing fresh challenges with the implementation of new solvency regimes – namely SAM and C-ROSS respectively. As Bearing in mind the advanced phase of the credit cycle in the was already the case with the preparations for adoption of Sol- United States as well as the political and economic uncertain- vency II, here too Hannover Re is optimally positioned to sup- ties in Europe, the conservative orientation of some parts of our port our customers as an expert, reliable and solution-driven investment portfolio will be preserved. Nevertheless, irrespec- partner. tive of the sovereign debt issue, the improved economic outlook will also be reflected in selective risk-taking. Our emphasis on When it comes to longevity business, it is our expectation that broad diversification will be retained unchanged. By way of a the steady rise in worldwide demand will be sustained in the neutral modified duration we shall continue to ensure that the coming year and further profitable business opportunities will interest rate risk is tightly managed. open up. Particularly in the Scandinavian markets and in the Netherlands, business potential can already be discerned. The enlargement of the asset portfolio is expected to have a positive effect on investment income, although the average In mature insurance markets we also see considerable upside return will decline owing to persistently low interest rates. Our in the years ahead for long-term care insurance products asset holdings are expected to increase again based on positive on account of the ageing population. Critical illness covers cash flow estimates. In view of the low returns on more secure continue to be in demand on Asian markets. Thanks to our investments, we shall continue to invest in products offering long-standing, international expertise Hannover Re is superbly attractive credit spreads and selectively expand our portfolio positioned here to meet the needs of our customers going in the areas of alternative investments and real estate. forward, as we have in the past. Changes affecting certain high-premium treaties can sometimes significantly reduce pre- Given the high capital requirements and potentially increased mium volume. volatility on equity markets – which are in part driven by liquidity –, we take a cautious stance on further new investments in Right across markets stronger demand can be felt for health listed equities at current valuation levels. insurance products. We operate selectively in this segment and offer our customers bespoke solutions. Outlook for the full 2016 financial year The continuing popularity of innovative, integrated, health-oriented insurance concepts is another worldwide trend. Society In the current financial year, despite a challenging environment is placing greater emphasis on a health-conscious lifestyle and in reinsurance business and on the capital market, we antici- insurers are increasingly tackling these needs by extending pate a good overall result for the Hannover Re Group. Bearing their product ranges. Wearable devices, for example, enable in mind developments both in property and casualty and in life users to track their fitness progress on a personalised basis. and health reinsurance, we expect to book a stable or slightly With the insured’s consent, such data can assist with the reduced gross premium volume – based on constant exchange assessment of an individual’s state of health. The integration rates – for our total portfolio in the current financial year. of the output of such mobile data sources into existing underwriting systems is a trend that will be sustained in the year The premium volume in property and casualty reinsurance ahead. We shall assist and systematically support our custom- is expected to contract slightly based on constant exchange ers in this process with the aid of innovative concepts. rates. This assumption is based firstly on our selective underwriting policy, according to which in large part we only write business that satisfies our margin requirements. It also reflects our expectation that high-volume quota share arrangements which still enjoyed strong demand among Chinese cedants in the year under review will be discontinued in 2016. The treaty renewals during the year are nevertheless anticipated to pass off favourably again thanks to our good ratings and long-standing stable customer relationships.

132 Hannover Re | Annual Report 2015 Even though market conditions in property and casualty reinsurance are likely to remain soft, the underwriting result should Events after the reporting come in roughly on the level of the 2015 financial year – pro- date vided the major loss incidence remains within the bounds of our expectations. In terms of our targeted combined ratio, No matters of special significance occurred after the closing we continue to aim for a figure under 96%. The EBIT mar- date for the consolidated financial statements. gin for property and casualty reinsurance should amount to at least 10%.

In life and health reinsurance we see further good business opportunities in the current year. We shall continue to strive to offer our customers not only traditional risk transfer but also comprehensive reinsurance service. Adjusted for exchange rate effects, we expect to book slightly higher gross premium in life and health reinsurance. It should, however, be borne in mind that changes affecting certain very high-premium treaties have significant implications for the business volume – and that Combined management report these can be either positive or volume-reducing. The Value of New Business (VNB) should be in excess of EUR 220 million. Our target EBIT margins remain unchanged at 2% for financial solutions and longevity business and 6% for mortality and morbidity business.

With regard to the IVC targets that we use to map economic value creation, we anticipate a minimum 2% xRoCA for property and casualty reinsurance and at least 3% xRoCA for life and health reinsurance.

The expected positive cash flow that we generate from the technical account and our investments should – based on stable exchange rates – lead to further growth in our asset port folio. We are looking to deliver a return on investment of 2.9%.

For 2016 we anticipate Group net income in the order of EUR 950 million. This is subject to the proviso that the burden of major losses does not significantly exceed the budgeted level of EUR 825 million and that there are no exceptional dis- tortions on capital markets.

In terms of the dividend for the current financial year, Hannover Re envisages a payout ratio in the range of 35% to 40% of its IFRS Group net income. This ratio may increase in light of capital management considerations if the present comfortable level of capitalisation remains unchanged.

Hannover Re | Annual Report 2015 133 134 Hannover Re | Annual Report 2015 Consolidated financial statements

Consolidated balance sheet as at 31 December 2015 136

Consolidated statement of income 2015 138

Consolidated statement of comprehensive income 2015 139

Consolidated statement of changes in shareholders’ equity 2015 140

Consolidated cash flow statement 2015 142

Notes to the consolidated financial statements 2015 145 Annual financial statements

Hannover Re | Annual Report 2015 135 Consolidated balance sheet as at 31 December 2015 N 01

Assets in EUR thousand Notes 31.12.2015 31.12.2014 Fixed-income securities – held to maturity 6.1 1,007,665 2,139,742 Fixed-income securities – loans and receivables 6.1 2,869,865 2,988,187 Fixed-income securities – available for sale 6.1 29,616,448 26,817,523 Fixed-income securities – at fair value through profit or loss 6.1 108,982 64,494 Equity securities – available for sale 6.1 452,108 32,804 Other financial assets – at fair value through profit or loss 6.1 39,602 66,394 Real estate and real estate funds 6.1 1,673,958 1,299,258 Investments in associated companies 6.1 128,008 154,822 Other invested assets 6.1 1,544,533 1,316,604 Short-term investments 6.1 1,113,130 575,300 Cash and cash equivalents 6.1 792,604 772,882 Total investments and cash under own management 39,346,903 36,228,010 Funds withheld 6.2 13,801,845 15,826,480 Contract deposits 6.3 188,604 92,069 Total investments 53,337,352 52,146,559 Reinsurance recoverables on unpaid claims 6.7 1,395,281 1,376,432 Reinsurance recoverables on benefit reserve 6.7 1,367,173 676,219 Prepaid reinsurance premium 6.7 164,023 149,257 Reinsurance recoverables on other technical reserves 6.7 8,687 5,446 Deferred acquisition costs 6.4 2,094,671 1,914,598 Accounts receivable 6.4 3,665,937 3,113,978 Goodwill 6.5 60,244 58,220 Deferred tax assets 7.5 433,500 393,923 Other assets 6.6 680,543 618,280 Accrued interest and rent 7,527 4,672 Total assets 63,214,938 60,457,584

136 Hannover Re | Annual Report 2015 Liabilities in EUR thousand Notes 31.12.2015 31.12.2014 Loss and loss adjustment expense reserve 6.7 26,556,388 24,112,056 Benefit reserve 6.7 12,206,699 11,757,132 Unearned premium reserve 6.7 3,159,363 2,748,594 Other technical provisions 6.7 325,528 324,240 Funds withheld 6.8 1,265,035 817,137 Contract deposits 6.9 4,682,484 6,072,338 Reinsurance payable 1,390,006 1,101,317 Provisions for pensions 6.10 150,299 171,501 Taxes 7.5 271,674 260,137 Deferred tax liabilities 7.5 1,932,722 1,875,591 Other liabilities 6.11 698,933 694,234 Long-term debt and subordinated capital 6.12 1,798,337 2,270,347 Total liabilities 54,437,468 52,204,624 Shareholders’ equity Common shares 6.13 120,597 120,597 Nominal value: 120,597 Conditional capital: 60,299 6.13 Additional paid-in capital 724,562 724,562 Common shares and additional paid-in capital 845,159 845,159 Cumulative other comprehensive income Unrealised gains and losses on investments 712,001 1,169,255 Cumulative foreign currency translation adjustment 509,189 190,454

Changes from hedging instruments (1,217) (8,748) Annual financial statements Other changes in cumulative other comprehensive income (36,571) (48,288) Total other comprehensive income 1,183,402 1,302,673 Retained earnings 6,039,783 5,402,926 Equity attributable to shareholders of Hannover Rück SE 8,068,344 7,550,758 Non-controlling interests 6.14 709,126 702,202 Total shareholders’ equity 8,777,470 8,252,960 Total liabilities 63,214,938 60,457,584

Hannover Re | Annual Report 2015 137 Consolidated statement of income 2015 N 02

in EUR thousand Notes 1.1. – 31.12.2015 1.1. – 31.12.2014 Gross written premium 7.1 17,068,663 14,361,801 Ceded written premium 2,219,094 1,781,064 Change in gross unearned premium (259,834) (154,362) Change in ceded unearned premium 3,307 (3,294) Net premium earned 14,593,042 12,423,081 Ordinary investment income 7.2 1,253,443 1,068,361 Profit / loss from investments in associated companies 7.2 19,169 1,042 Realised gains and losses on investments 7.2 135,847 182,453 Change in fair value of financial instruments 7.2 901 (33,257) Total depreciation, impairments and appreciation of investments 7.2 38,098 27,558 Other investment expenses 7.2 101,202 95,256 Net income from investments under own management 1,270,060 1,095,785 Income / expense on funds withheld and contract deposits 7.2 395,033 376,056 Net investment income 1,665,093 1,471,841 Other technical income 7.3 1,290 1,641 Total revenues 16,259,425 13,896,563 Claims and claims expenses 7.3 11,075,407 9,464,172 Change in benefit reserves 7.3 101,157 28,625 Commission and brokerage, change in deferred acquisition costs 7.3 2,918,429 2,579,368 Other acquisition costs 5,652 4,878 Other technical expenses 7.3 1,348 7,461 Administrative expenses 7.3 398,512 363,859 Total technical expenses 14,500,505 12,448,363 Other income and expenses 7.4 (3,684) 18,190 Operating profit / loss (EBIT) 1,755,236 1,466,390 Interest on hybrid capital 6.12 84,316 95,720 Net income before taxes 1,670,920 1,370,670 Taxes 7.5 456,207 305,563 Net income 1,214,713 1,065,107 thereof Non-controlling interest in profit and loss 6.14 63,988 79,458 Group net income 1,150,725 985,649 Earnings per share (in EUR) 8.5 Basic earnings per share 9.54 8.17 Diluted earnings per share 9.54 8.17

138 Hannover Re | Annual Report 2015 Consolidated statement of comprehensive income 2015 N 03

in EUR thousand 1.1. – 31.12.2015 1.1. – 31.12.2014 Net income 1,214,713 1,065,107 Not reclassifiable to the consolidated statement of income Actuarial gains and losses Gains (losses) recognised directly in equity 18,997 (51,190) Tax income (expense) (5,721) 16,287 13,276 (34,903) Income and expense recognised directly in equity that cannot be reclassified Gains (losses) recognised directly in equity 18,997 (51,190) Tax income (expense) (5,721) 16,287 13,276 (34,903) Reclassifiable to the consolidated statement of income Unrealised gains and losses on investments Gains (losses) recognised directly in equity (481,349) 1,051,409 Transferred to the consolidated statement of income (162,990) (147,075) Tax income (expense) 164,008 (240,809) (480,331) 663,525 Currency translation Gains (losses) recognised directly in equity 339,324 476,440 Transferred to the consolidated statement of income – 50 Tax income (expense) (13,672) (33,301) 325,652 443,189 Changes from the measurement of associated companies Annual financial statements Gains (losses) recognised directly in equity 2,831 10,217 Transferred to the consolidated statement of income (424) – 2,407 10,217 Changes from hedging instruments Gains (losses) recognised directly in equity 9,420 1,066 Tax income (expense) (1,819) (340) 7,601 726 Reclassifiable income and expense recognised directly in equity Gains (losses) recognised directly in equity (129,774) 1,539,132 Transferred to the consolidated statement of income (163,414) (147,025) Tax income (expense) 148,517 (274,450) (144,671) 1,117,657 Total income and expense recognised directly in equity Gains (losses) recognised directly in equity (110,777) 1,487,942 Transferred to the consolidated statement of income (163,414) (147,025) Tax income (expense) 142,796 (258,163) (131,395) 1,082,754 Total recognised income and expense 1,083,318 2,147,861 thereof Attributable to non-controlling interests 51,864 123,107 Attributable to shareholders of Hannover Rück SE 1,031,454 2,024,754

Hannover Re | Annual Report 2015 139 Consolidated statement of changes N 04 in shareholders’ equity 2015

Common Additional Other reserves Continuation: Other reserves Retained Equity attributable Non-controlling Total shares paid-in capital (cumulative other comprehensive income) (cumulative other comprehensive income) earnings to shareholders of interests shareholders’ Hannover Rück SE equity Unrealised Currency Hedging Other in EUR thousand gains / losses translation instruments Balance as at 1.1.2014 120,597 724,562 533,745 (246,279) (9,455) (16,452) 4,781,718 5,888,436 641,591 6,530,027 Changes in ownership interest with no change of control status – – 2,172 (103) – (60) (2,637) (628) (19,452) (20,080) Changes in the consolidated group – – – – – – – – (1,387) (1,387) Capital increases / additions – – – – – – – – 4 4 Capital repayments – – – – – – – – (72) (72) Acquisition / disposal of treasury shares – – – – – – (13) (13) – (13) Total income and expense recognised directly in equity – – 633,338 436,836 707 (31,776) – 1,039,105 43,649 1,082,754 Net income – – – – – – 985,649 985,649 79,458 1,065,107 Dividends paid – – – – – – (361,791) (361,791) (41,589) (403,380) Balance as at 31.12.2014 120,597 724,562 1,169,255 190,454 (8,748) (48,288) 5,402,926 7,550,758 702,202 8,252,960

Balance as at 1.1.2015 120,597 724,562 1,169,255 190,454 (8,748) (48,288) 5,402,926 7,550,758 702,202 8,252,960 Changes in ownership interest with no change of control status – – – – – – (1,320) (1,320) (1,189) (2,509) Changes in the consolidated group – – – – – – – – 966 966 Capital increases / additions – – – – – – – – 189 189 Capital repayments – – – – – – – – (9) (9) Acquisition / disposal of treasury shares – – – – – – (10) (10) – (10) Total income and expense recognised in equity – – (457,254) 318,735 7,531 11,717 – (119,271) (12,124) (131,395) Net income – – – – – – 1,150,725 1,150,725 63,988 1,214,713 Dividends paid – – – – – – (512,538) (512,538) (44,897) (557,435) Balance as at 31.12.2015 120,597 724,562 712,001 509,189 (1,217) (36,571) 6,039,783 8,068,344 709,126 8,777,470

140 Hannover Re | Annual Report 2015 Common Additional Other reserves Continuation: Other reserves Retained Equity attributable Non-controlling Total shares paid-in capital (cumulative other comprehensive income) (cumulative other comprehensive income) earnings to shareholders of interests shareholders’ Hannover Rück SE equity Unrealised Currency Hedging Other in EUR thousand gains / losses translation instruments Balance as at 1.1.2014 120,597 724,562 533,745 (246,279) (9,455) (16,452) 4,781,718 5,888,436 641,591 6,530,027 Changes in ownership interest with no change of control status – – 2,172 (103) – (60) (2,637) (628) (19,452) (20,080) Changes in the consolidated group – – – – – – – – (1,387) (1,387) Capital increases / additions – – – – – – – – 4 4 Capital repayments – – – – – – – – (72) (72) Acquisition / disposal of treasury shares – – – – – – (13) (13) – (13) Total income and expense recognised directly in equity – – 633,338 436,836 707 (31,776) – 1,039,105 43,649 1,082,754 Net income – – – – – – 985,649 985,649 79,458 1,065,107 Dividends paid – – – – – – (361,791) (361,791) (41,589) (403,380) Balance as at 31.12.2014 120,597 724,562 1,169,255 190,454 (8,748) (48,288) 5,402,926 7,550,758 702,202 8,252,960

Total income and expense recognised Annual financial statements in equity – – (457,254) 318,735 7,531 11,717 – (119,271) (12,124) (131,395) Net income – – – – – – 1,150,725 1,150,725 63,988 1,214,713 Dividends paid – – – – – – (512,538) (512,538) (44,897) (557,435) Balance as at 31.12.2015 120,597 724,562 712,001 509,189 (1,217) (36,571) 6,039,783 8,068,344 709,126 8,777,470

Hannover Re | Annual Report 2015 141 Consolidated cash flow statement 2015 N 05

in EUR thousand 1.1. – 31.12.2015 1.1. – 31.12.2014 I. Cash flow from operating activities Net income 1,214,713 1,065,107 Appreciation / depreciation 64,493 58,384 Net realised gains and losses on investments (135,847) (182,453) Change in fair value of financial instruments (through profit or loss) (901) 33,257 Realised gains and losses on deconsolidation (835) (2,602) Amortisation of investments 96,540 83,382 Changes in funds withheld 3,454,332 (482,106) Net changes in contract deposits (1,923,135) 119,362 Changes in prepaid reinsurance premium (net) 256,527 157,349 Changes in tax assets / provisions for taxes 159,250 182,543 Changes in benefit eserver (net) (958,105) 57,841 Changes in claims reserves (net) 1,229,670 1,106,308 Changes in deferred acquisition costs (97,673) (121,881) Changes in other technical provisions (9,106) 38,995 Changes in clearing balances (97,390) 73,975 Changes in other assets and liabilities (net) (147,658) (256,569) Cash flow from operating activities 3,104,875 1,930,892

142 Hannover Re | Annual Report 2015 in EUR thousand 1.1. – 31.12.2015 1.1. – 31.12.2014 II. Cash flow from investing activities Fixed-income securities – held to maturity Maturities 1,184,382 618,208 Purchases – (1,395) Fixed-income securities – loans and receivables Maturities, sales 358,350 427,121 Purchases (153,057) (100,302) Fixed-income securities – available for sale Maturities, sales 10,400,105 11,304,019 Purchases (12,362,146) (13,167,728) Fixed-income securities – at fair value through profit or loss Maturities, sales 20,211 9,649 Purchases (58,570) (34,622) Equity securities – available for sale Sales 5,284 10,932 Purchases (402,902) (9,793) Other financial assets – at fair value through profit or loss Sales 74,043 59,706 Purchases (33,312) (19,148) Other invested assets Sales 183,271 142,588 Purchases (379,296) (259,511) Affiliated companies and participating interests Annual financial statements Sales 59,723 24,688 Purchases (28,453) (45,408) Real estate and real estate funds Sales 104,414 102,472 Purchases (458,294) (230,502) Short-term investments Changes (531,057) 11,735 Other changes (net) (30,771) (38,050) Cash flow from investing activities (2,048,075) (1,195,341)

Hannover Re | Annual Report 2015 143 in EUR thousand 1.1. – 31.12.2015 1.1. – 31.12.2014 III. Cash flow from financing activities Contribution from capital measures 4,007 876 Payment on capital measures (3,604) (4,769) Structural change without loss of control (2,509) (20,080) Dividends paid (557,435) (403,380) Proceeds from long-term debts 23,400 554,095 Repayment of long-term debts (518,642) (774,338) Other changes (net) (10) (13) Cash flow from financing activities (1,054,793) (647,609)

IV. Exchange rate differences on cash 17,715 46,058

Cash and cash equivalents at the beginning of the period 772,882 642,936 Change in cash and cash equivalents (I. + II. + III. + IV.) 19,722 134,000 Changes in the consolidated group – (4,054) Cash and cash equivalents at the end of the period 792,604 772,882

Supplementary information on the cash flow statement 1 Income taxes paid (on balance) (311,241) (113,032) Dividend receipts 2 162,612 71,844 Interest received 1,509,625 1,415,936 Interest paid (182,910) (175,025)

1 The income taxes paid, dividend receipts as well as interest received and paid are included entirely in the cash flow from operating activities. 2 Including dividend-like profit participations from investment funds

144 Hannover Re | Annual Report 2015 Notes to the consolidated financial statements 2015

1. Company information 146 6.10 Provisions for pensions and other post-employment benefit obligations 203 2. Accounting principles 146 6.11 Other liabilities 207 6.12 Debt and subordinated capital 208 3. Accounting policies 149 6.13 Shareholders’ equity and 3.1 Changes in accounting policies 149 treasury shares 212 3.2 Summary of major accounting policies 149 6.14 Non-controlling interests 213 3.3 Major discretionary decisions and estimates 156 7. Notes on the individual items of the statement of income 214 4. Consolidation 157 7.1 Gross written premium 214 4.1 Consolidation principles 157 7.2 Investment income 215 4.2 Consolidated companies and 7.3 Reinsurance result 217 complete list of shareholdings 158 7.4 Other income and expenses 218 Annual financial statements 4.3 Major acquisitions and 7.5 Taxes on income 219 new formations 170 4.4 Major disposals and retirements 170 8. Other notes 222 4.5 Other corporate changes 171 8.1 Derivative financial instruments and financial guarantees 222 5. Segment reporting 171 8.2 Related party disclosures 225 8.3 Share-based payment 227 6. Notes on the individual items of the 8.4 Staff and expenditures on personnel 231 balance sheet 176 8.5 Earnings per share and 6.1 Investments under own management 176 dividend proposal 231 6.2 Funds withheld (assets) 192 8.6 Lawsuits 232 6.3 Contract deposits (assets) 192 8.7 Contingent liabilities and 6.4 Technical assets 192 commitments 232 6.5 Goodwill 194 8.8 Long-term commitments 233 6.6 Other assets 195 8.9 Rents and leasing 233 6.7 Technical provisions 198 8.10 Fee paid to the auditor 234 6.8 Funds withheld (liabilities) 203 8.11 Events after the balance sheet date 235 6.9 Contract deposits (liabilities) 203

Hannover Re | Annual Report 2015 145 1. Company information

Hannover Rück SE and its subsidiaries (collectively referred to is a European Company, Societas Europaea (SE), which has its as the “Hannover Re Group” or “Hannover Re”) transact all lines registered office at Karl-Wiechert-Allee 50, 30625 Hannover, of property & casualty and life & health reinsurance. With gross Germany, and is entered in the commercial register of Hannover premium of approximately EUR 17.1 billion, Hannover Re is the County Court under the number HR Hannover B 6778. 50.2% third-largest reinsurance group in the world. The company’s net- (rounded) of the shares of Hannover Rück SE are held by Talanx work consists of more than 130 subsidiaries, affiliates, branches AG, Hannover, which in turn is majority-owned – with an inter- and representative offices worldwide with a total workforce of est of 79% – by HDI Haftpflichtverband der Deutschen Industrie roughly 2,500. The Group’s German business is conducted by V.a.G. (HDI), Hannover. the subsidiary E+S Rückversicherung AG. Hannover Rück SE

2. Accounting principles

Hannover Rück SE and its subsidiaries are required to pre- Since 2002 the standards adopted by the International Account- pare a consolidated financial statement and group manage- ing Standards Board (IASB) have been referred to as “Inter- ment report in accordance with § 290 German Commercial national Financial Reporting Standards (IFRS)”; the standards Code (HGB). dating from earlier years still bear the name “International Accounting Standards (IAS)”. Standards are cited in our notes Pursuant to EU Regulation (EC) No. 1606 / 2002, the present accordingly; in cases where the notes do not make explicit consolidated financial statement and group management report reference to a particular standard, the term IFRS is used. In of Hannover Re have been drawn up in accordance with the view of the fact that reinsurance contracts, in conformity with International Financial Reporting Standards (IFRS) that are to IFRS 4 “Insurance Contracts”, are recognised according to be applied within the European Union. In addition, we have the pertinent provisions of United States Generally Accepted made allowance for the regulations that are also applicable Accounting Principles (US GAAP) as applicable on the date of pursuant to § 315a Para. 1 German Commercial Code (HGB) initial application of IFRS 4 on 1 January 2005, we cite individ- and the supplementary provisions of the Articles of Association ual insurance-specific standards of US GAAP using the desig- of Hannover Rück SE as amended on 18 July 2013. nation “Statement of Financial Accounting Standard (SFAS)” that was valid at that time. The consolidated financial statement reflects all IFRS in force as at 31 December 2015 as well as all interpretations issued The declaration of conformity required pursuant to § 161 Ger- by the International Financial Reporting Interpretations Com- man Stock Corporation Act (AktG) regarding compliance with mittee (IFRIC), application of which was mandatory for the the German Corporate Governance Code has been submitted year under review. IFRS 4 “Insurance Contracts” requires and, as described in the Declaration of the Executive Board disclosures on the nature and extent of risks stemming from regarding the Corporate Governance of the Company, made reinsurance contracts, while IFRS 7 “Financial Instruments: permanently available on the Hannover Re website. Disclosures” requires similar information on risks from financial instruments. Additionally, § 315 Para. 2 Number 2 German The annual financial statements included in the consoli- Commercial Code (HGB) also contains requirements for insur- dated financial statement were for the most part drawn up as ance undertakings with regard to information on the manage- at 31 December. Pursuant to IFRS 10 “Consolidated Finan- ment of underwriting and financial risks that is to be provided cial Statements” there is no requirement to compile interim in the management report. The disclosures resulting from these accounts for Group companies with diverging reporting dates requirements are included in the risk report. We have dis- because their closing dates are no earlier than three months pensed with an additional presentation of the same content in prior to the closing date for the consolidated financial state- the notes. In order to obtain a comprehensive overview of the ment. Insofar as no interim accounts were drawn up, allow- risks to which Hannover Re is exposed it is therefore necessary ance has been made for the effects of significant transactions to consider both the risk report and the relevant information in between the diverging reporting dates and the closing date for the notes. We refer the reader accordingly to the correspond- the consolidated financial statement. ing remarks in the risk report and the notes. The annual financial statements of all companies were drawn up in accordance with standard Group accounting and measurement rules pursuant to IFRS.

146 Hannover Re | Annual Report 2015 The consolidated financial statement was drawn up in euros The present consolidated financial statement was released for (EUR), the amounts shown have been rounded to EUR thou- publication by a resolution of the Executive Board on 22 Feb- sands and – provided this does not detract from transpar- ruary 2016. ency – to EUR millions. Figures indicated in brackets refer to the previous year.

New accounting standards or accounting standards applied for the first time

In December 2013 the IASB issued “Annual Improvements to Property”. The improvements are effective for annual peri- IFRSs 2011 – 2013 Cycle”. The annual improvements involve ods beginning on or after 1 July 2014 and were endorsed by minor amendments and clarifications relating to the following the EU in December 2014. Initial application of the revised standards: IFRS 1 “First-time Adoption of International Finan- standards did not give rise to any significant implications for cial Reporting Standards”, IFRS 3 “Business Combinations”, Hannover Re. IFRS 13 “Fair Value Measurement” and IAS 40 “Investment

Standards or changes in standards that have not yet entered into force or are not yet applicable

In January 2016 the IASB issued IFRS 16 “Leases” setting recognition of insurance and reinsurance contracts. The Expo- out new principles governing the recognition, measurement, sure Draft contains two possible solutions. Under the so-called presentation and disclosure of leases. The most significant deferral approach entities whose predominant activity is issu- new requirements relate principally to accounting by lessees. ing insurance and reinsurance contracts within the scope of In future, the lessee shall as a general principle recognise a IFRS 4 would be granted an optional temporary exemption lease liability for all leases. At the same time it shall recognise a from recognising their financial instruments in accordance with right to use the underlying asset. The standard is to be applied IFRS 9 until the recognition of insurance and reinsurance con- to annual periods beginning on or after 1 January 2019 and tracts has been finally settled, although this option could not has still to be endorsed by the EU. Hannover Re is currently be used after 1 January 2021. The so-called overlay approach exploring the implications of the new requirements and does would permit entities to reclassify from profit or loss to other Annual financial statements not expect them to have any significant effect on the consoli- comprehensive income some of the income or expenses aris- dated financial statement. ing from designated financial assets that are measured at fair value through profit or loss in their entirety applying IFRS 9 but In July 2014 the IASB published the final version of IFRS 9 would not have been so measured applying IAS 39 “Financial “Financial Instruments”, which replaces all previous versions Instruments: Recognition and Measurement”. of this standard. The standard now contains requirements governing classification and measurement, impairment based on In May 2014 the IASB issued IFRS 15 “Revenue from Con- the new expected loss impairment model and general hedge tracts with Customers”. The standard specifies when and in accounting. The originally included model for macro hedge what amount revenue is to be recognised and which disclo- accounting, which considers risk management that assesses sures are required for this purpose. IFRS 15 provides a single risk exposures on a continuous basis and at a portfolio level, five-step model to be applied to all contracts with customers. is being treated separately from general hedge accounting by Financial instruments and other contractual rights and obli- the IASB outside of IFRS 9. Initial mandatory application of the gations which are to be recognised under separate standards standard, which has still to be endorsed by the EU, is set for as well as (re)insurance contracts within the scope of IFRS 4 annual periods beginning on or after 1 January 2018. Hannover are expressly exempted from the standard’s scope of applica- Re is currently exploring the implications of this standard and tion. The standard is to be applied for the first time to annual anticipates significant implications for the consolidated finan- periods beginning on or after 1 January 2018 and has still to cial statement. In December 2015, however, the IASB published be endorsed by the EU. The new standard does not apply to the Exposure Draft ED / 2015 / 11 “Applying IFRS 9 Financial reinsurance contracts. Possible implications for Group com- Instruments with IFRS 4 Insurance Contracts” containing pro- panies that realise revenues outside of reinsurance business posals to amend the existing IFRS 4 “Insurance Contracts”. It are currently being analysed but cannot as yet be foreseen. is intended to address the implications of the different effective dates of IFRS 9 and the anticipated new standard for the

Hannover Re | Annual Report 2015 147 In addition to the accounting principles described above, the IASB has issued the following standards, interpretations and amendments to existing standards with possible implications for the consolidated financial statement of Hannover Re, application of which was not yet mandatory for the year under review and which are not being applied early by Hannover Re. Initial application of these new standards is not expected to have any significant implications for Hannover Re’s assets, financial position or net income:

Further IFRS Amendments and Interpretations N 06

Initial application to annual periods beginning on Published: Title or after the following date: January 2016 Amendments to IAS 7: Disclosure Initiative 1 January 2017 (still to be endorsed by the EU) January 2016 Amendments to IAS 12: Recognition of Deferred 1 January 2017 (still to be endorsed by the EU) Tax Assets for Unrealised Losses December 2014 Amendments to IFRS 10, IFRS 12 and IAS 28: 1 January 2016 (still to be endorsed by the EU) Investment Entities: Applying the Consolidation Exception December 2014 Amendments to IAS 1: Disclosure Initiative 1 January 2016 September 2014 Annual Improvements to IFRSs 2012-2014 Cycle 1 January 2016 September 2014 Amendments to IFRS 10 and IAS 28: Sale or deferred (still to be endorsed by the EU) Contribution of Assets between an Investor and its Associate or Joint Venture May 2014 Amendments to IAS 16 and IAS 38: Clarification 1 January 2016 of Acceptable Methods of Depreciation and Amortisation May 2014 Amendments to IFRS 11: Accounting for 1 January 2016 Acquisitions of Interests in Joint Operations January 2014 IFRS 14 Regulatory Deferral Accounts 1 January 2016 (still to be endorsed by the EU) December 2013 Annual Improvements to IFRSs 2010-2012 Cycle 1 February 2015 November 2013 Defined Benefit Plans: Employee Contributions 1 February 2015 (Amendments to IAS 19)

148 Hannover Re | Annual Report 2015 3. Accounting policies

3.1 Changes in accounting policies

With effect from the first quarter of 2015 Hannover Re extended period under review without restatement of the comparative its estimation methods to include an additional subportfolio. figures for previous periods. Retention of the parameters and This extension, which relates to estimated amounts from rein- methods used until 31 December 2014 would have reduced surance treaties that have not yet been brought to account and the gross premium by EUR 89.8 million, the net premium the deferral thereof, helped to improve the accuracy of estima- earned by EUR 28.7 million and the operating profit (EBIT) by tion. This represents a change in an accounting estimate, which EUR 15.1 million in the year under review. The effects of this pursuant to IAS 8 “Accounting Policies, Changes in Accounting restatement in future reporting periods could only be deter- Estimates and Errors” is to be performed prospectively in the mined with disproportionate effort.

3.2 Summary of major accounting policies

Reinsurance contracts: IFRS 4 “Insurance Contracts” repre- Financial assets held to maturity are comprised of non-de- sents the outcome of Phase I of the IASB project “Insurance rivative assets that entail fixed or determinable payments on Contracts” and serves as a transitional arrangement until the a defined due date and are acquired with the intent and ability IASB defines the measurement of insurance contracts after to be held until maturity. They are measured at amortised cost. completion of Phase II. IFRS 4 sets out basic principles for The corresponding premiums or discounts are recognised in the accounting of insurance contracts. Underwriting business profit or loss across the duration of the instruments using the is to be subdivided into insurance and investment contracts. effective interest rate method. A write-down is taken in the Contracts with a significant insurance risk are considered to event of permanent impairment. Please refer to our comments be insurance contracts, while contracts without significant on impairments in this section. insurance risk are to be classified as investment contracts. The standard is also applicable to reinsurance contracts. IFRS 4 Loans and receivables are non-derivative financial instruments contains fundamental rules governing specific circumstances, that entail fixed or determinable payments on a defined due Annual financial statements such as the separation of embedded derivatives and unbun- date and are not listed on an active market or sold at short dling of deposit components, but it does not set out any more notice. They are carried at amortised cost. extensive provisions relating to the measurement of insurance and reinsurance contracts. In conformity with the basic rules of Premiums or discounts are deducted or added within the state- IFRS 4 and the IFRS Framework, reinsurance-specific transac- ment of income using the effective interest rate method until tions therefore continue to be recognised in accordance with the amount repayable becomes due. Impairment is taken only the pertinent provisions of US GAAP (United States Generally to the extent that repayment of a loan is unlikely or no longer Accepted Accounting Principles) as applicable on the date of expected in the full amount. Please refer to our comments on initial application of IFRS 4 on 1 January 2005. impairments in this section.

Financial assets: as a basic principle we recognise the purchase and sale of directly held financial assets including derivative financial instruments as at the settlement date. The recognition of fixed-income securities includes apportionable accrued interest.

Hannover Re | Annual Report 2015 149 Valuation models N 07

Financial instrument Parameter Pricing model Fixed-income securities Unlisted plain vanilla bonds, Interest rate curve Present value method interest rate swaps Unlisted structured bonds Interest rate curve, volatility surfaces Hull-White, Black-Karasinski, LIBOR market model etc. Unlisted ABS / MBS, CDO / CLO Risk premiums, default rates, prepayment Present value method speed and recovery rates Other invested assets Unlisted equities and equity investments Acquisition cost, cash flows, EBIT Capitalised earnings method, multiples, as applicable book value discounted cash flow method, multiple-based approaches Private equity funds, private equity Audited net asset values (NAV) Net asset value method real estate funds Unlisted bond, equity and Audited net asset values (NAV) Net asset value method real estate funds Other financial assets – at fair value through profit or loss Currency forwards Interest rate curves, spot and forward rates Interest parity model Inflation swaps Inflation swap rates (Consumer Price Present value method with seasonality Index), historical index fixings, interest adjustment rate curve OTC stock options, Listing of the underlying share, implicit Black-Scholes OTC stock index options volatilities, money-market interest rate, dividend yield Insurance derivatives Fair values, actuarial parameters, interest Present value method rate curve

Financial assets at fair value through profit or loss consist of Financial assets classified as available for sale are carried securities held for trading and those classified as measured at at fair value; accrued interest is recognised in this context. fair value through profit or loss since acquisition. This refers We allocate to this category those financial instruments that principally to unsecured debt instruments issued by corporate do not satisfy the criteria for classification as held to maturity, issuers and derivative financial instruments. Within the scope loans and receivables, at fair value through profit or loss, or of the fair value option provided under IAS 39 “Financial Instru- trading. Unrealised gains and losses arising out of changes in ments: Recognition and Measurement”, according to which the fair value of securities held as available for sale are recog- financial assets may be carried at fair value on first-time rec- nised – with the exception of currency valuation differences on ognition subject to certain conditions, all structured securities monetary items – directly in shareholder’s equity after deduc- that would have needed to have been broken down had they tion of deferred taxes. been recognised as available for sale or under loans and receivables are also recognised here. Hannover Re makes use of the Establishment of the fair value of financial instruments fair value option solely for selected subportfolios of its finan- carried as assets or liabilities: we establish the fair value of cial assets. Securities held for trading and securities classified financial instruments carried as assets or liabilities using the as measured at fair value through profit or loss since acquisi- methods and models described below. The fair value of a finan- tion are carried at their fair value on the balance sheet date. cial instrument corresponds to the amount that Hannover Re If stock market prices are not available for use as fair values, would receive or pay if it were to sell or settle the said financial the carrying amounts are determined using generally acknowl- instrument on the balance sheet date. Insofar as market prices edged measurement methods. All changes in fair values from are listed on markets for financial assets, their bid price is used; this measurement are recognised in investment income. The financial liabilities are valued at ask price. In other cases the classification of financial assets at fair value through profit or fair values are established on the basis of the market condi- loss is compatible with Hannover Re’s risk management strat- tions prevailing on the balance sheet date for financial assets egy and investment strategy, which are oriented extensively with similar credit rating, duration and return characteristics or towards economic fair value variables. using recognised models of mathematical finance. Hannover Re uses a number of different valuation models for this purpose. The details are set out in the table on this page. Financial assets for which no publicly available prices or observable market data

150 Hannover Re | Annual Report 2015 can be used as inputs (financial instruments belonging to fair reflect the specific character of these funds (in this case initially value hierarchy level 3) are for the most part measured on the negative yield and liquidity flows from the so-called “J curve” basis of proven valuations drawn up by knowledgeable, inde- effect during the investment period of the funds), we take an pendent experts, e. g. audited net asset value, the plausibility impairment to net asset value as an approximation of the fair of which has previously been subjected to systematic review. value for the first time after a two-year waiting period if there For further information please see our explanatory remarks is a significant or prolonged decrease in value. on the fair value hierarchy in Section 6.1 “Investments under own management”. Netting of financial instruments: financial assets and liabilities are only netted and recognised in the appropriate net Impairments: As at each balance sheet date we review our amount if a corresponding legal claim (reciprocity, similarity financial assets with an eye to the need to take impairments. and maturity) exists or is expressly agreed by contract, in other Permanent impairments on all invested assets are recognised words if the intention exists to offset such items on a net basis directly in the statement of income. In this context we take as or to effect this offsetting simultaneously. a basis the same indicators as those subsequently discussed for fixed-income securities and securities with the character Other invested assets are for the most part recognised at of equity. Qualitative case-by-case analysis is also carried out. nominal value. Insofar as such financial assets are not listed IAS 39 “Financial Instruments: Recognition and Measure- on public markets (e. g. participating interests in private equity ment” contains a list of objective, substantial indications for firms), they are carried at the latest available net asset value impairments of financial assets. In the case of fixed-income as an approximation of the fair value. Loans included in this securities and loans reference is made, in particular, to the item are recognised at amortised cost. rating of the instrument, the rating of the issuer / borrower as well as the individual market assessment in order to establish Investments in associated companies are valued at equity on whether they are impaired. With respect to held-to-maturity the basis of the proportionate shareholders’ equity attributable instruments as well as loans and receivables recognised at to the Group. Further information is provided in Section 4.1 amortised cost, the level of impairment is arrived at from the “Consolidation principles”. difference between the book value of the asset and the present value of the expected future earnings flows. The book value is Real estate used by third parties (investment property) is reduced directly by this amount which is then recognised as valued at cost less scheduled depreciation and impairment. an expense. With the exception of value adjustments taken on Straight-line depreciation is taken over the expected useful accounts receivable, we recognize impairments directly on the life – at most 50 years. Under the impairment test the market Annual financial statements assets side – without using an adjustment account – separately value of real estate for third-party use (recoverable amount) is from the relevant items. If the reasons for the write-down no determined using acknowledged valuation methods and com- longer apply, a write-up is made in income up to at most the pared with the book value; arising impairments are recognised. original amortised cost for fixed-income securities. Maintenance costs and repairs are expensed. Value-enhanc- ing expenditures are capitalised if they extend the useful life. With respect to impairments on securities with the character of equity, IAS 39 “Financial Instruments: Recognition and Meas- Cash and cash equivalents are carried at face value. Cash col- urement” states, in addition to the aforementioned principles, lateral that we have received for the hedging of positive fair that a significant or prolonged decrease in fair value below values of derivatives is shown under other liabilities. acquisition cost constitutes objective evidence of impairment. Hannover Re considers equity securities to be impaired under Funds withheld are receivables due to reinsurers from their cli- IAS 39 if their fair value falls significantly, i. e. by at least 20%, ents in the amount of the cash deposits contractually withheld or for a prolonged period, i. e. at least nine months, below by such clients; they are recognised at acquisition cost (nom- acquisition cost. In accordance with IAS 39 the reversal of inal amount). Appropriate allowance is made for credit risks. impairment losses on equities to the statement of income once impairment has been taken is prohibited, as is adjustment of the cost basis. Impairment is tested in each reporting period using the criteria defined by Hannover Re. If an equity security is considered to be impaired on the basis of these criteria, IAS 39 requires that a value adjustment be recognised in the amount of the fair value less historical cost and less prior value adjustments, meaning that depreciation is taken on the fair value as at the closing date – if available, on the publicly quoted stock exchange price. We also apply this method to participations in funds that invest in private equity. In order to

Hannover Re | Annual Report 2015 151 Contract deposits: under this item we report receivables and The other intangible assets largely consist of purchased and liabilities under insurance contracts that satisfy the test of a self-developed software. This is recognised at acquisition cost significant risk transfer to the reinsurer as required by IFRS 4 less scheduled depreciation. Intangible assets are regularly “Insurance Contracts” but fail to meet the risk transfer required tested for impairment and impairment is taken where nec- by US GAAP. IFRS 4 in conjunction with SFAS 113 requires essary. The other intangible assets also include the expected insurance contracts that transfer a significant technical risk profits from acquired life reinsurance portfolios. These are from the ceding company to the reinsurer to be differentiated carried at the present value of future profits (PVFP) at time of from those under which the risk transfer is of merely subor- acquisition, which is calculated as the present value of profits dinate importance. Since the risk transfer under the affected expected from the acquired blocks of business disregarding transactions is of subordinate importance, these contracts are new business and tax effects. Scheduled amortisation is taken recognised using the “deposit accounting” method and hence according to the periods of the underlying acquired contracts. eliminated from the technical account. The compensation for The PVFP is regularly tested for impairment using a liability risk assumption booked to income under these contracts is adequacy test and impairments are taken if necessary. In this netted under other income and expenses. The payment flows regard please see Section 3.3 “Major discretionary decisions resulting from these contracts are shown in the cash flow state- and estimates”. ment under operating activities. Deferred tax assets: IAS 12 “Income Taxes” requires that Accounts receivable: the accounts receivable under reinsur- assets-side deferred taxes be established if assets have to be ance business and the other receivables are carried at nomi- recognised in a lower amount or liabilities in a higher amount nal value; value adjustments are made where necessary on the in the consolidated balance sheet than in the tax balance sheet basis of a case-by-case analysis. We use adjustment accounts and if these temporary differences will lead to reduced tax bur- for value adjustments taken on reinsurance accounts receiv- dens in the future. In principle, temporary differences result able, while all other write-downs are booked directly against from the valuation differences between the tax balance sheets the underlying position. drawn up in accordance with national standards and the IFRS balance sheets of the companies included in the consolidated Deferred acquisition costs principally consist of commissions financial statement drawn up in accordance with uniform group and other variable costs directly connected with the acquisition standards as well as from consolidation processes. Deferred or renewal of existing reinsurance contracts. These acquisition tax assets and liabilities are not established if they arise out costs are capitalised and amortised over the expected period of assets or liabilities, the book value of which upon first-time of the underlying reinsurance contracts. Deferred acquisition recognition diverges from their initial tax base. costs are regularly tested for impairment. Deferred tax assets are also recognised on tax loss carry-for- Reinsurance recoverables on technical reserves: shares of wards and tax credits. Insofar as the deferred taxes refer to our retrocessionaires in the technical reserves are calculated items carried directly in equity, the resulting deferred taxes are according to the contractual conditions on the basis of the also recognised directly in equity. Value adjustments are taken gross technical reserves. Appropriate allowance is made for on deferred tax assets as soon as realisation of the receivable credit risks. no longer appears likely. Deferred taxes are measured according to the tax regulations specific to the country concerned Intangible assets: in accordance with IFRS 3 “Business Com- that are applicable or have been adopted as at the closing date. binations” goodwill is not amortised; instead, impairments may be taken after an annual impairment test or as indicated. For Deferred tax assets may only be netted with deferred tax lia- the purposes of the impairment test, goodwill is to be allocated bilities if an enforceable right exists to net actual tax refund pursuant to IAS 36 “Impairment of Assets” to so-called “cash claims with actual taxes owing. A precondition here is that the generating units” (CGUs). Each CGU to which goodwill is allo- deferred tax assets and deferred tax liabilities refer to income cated should represent the lowest level on which goodwill is taxes that are levied by the same revenue authority either for monitored for internal management purposes and may not be (i) the same taxable entity or for (ii) different taxable entities. In larger than a segment. Following allocation of the goodwill it is this regard, there must be an intention – in every future period necessary to determine for each CGU the recoverable amount, in which the discharge or realisation of substantial amounts of defined as the higher of the value in use and the fair value less deferred tax liabilities / deferred tax assets is to be expected – costs to sell. For impaired goodwill the recoverable amount is either to bring about the settlement of the actual taxes owing to be stated. The recoverable amount is to be compared with and refund claims on a net basis or to discharge the liabilities the book value of the CGU including goodwill. When the latter at the same time as the claims are realised. exceeds the recoverable amount, an impairment expense is to be recognised. For detailed information on the impairment method used and the goodwill recognised as at the balance sheet date, please see Section 6.5 “Goodwill”.

152 Hannover Re | Annual Report 2015 Own-use real estate: The portfolio of own-use real estate is capital market rate for highest-rated securities. All changes in measured at cost less scheduled straight-line depreciation over valuation, especially actuarial gains and losses, are captured a useful life of no more than 50 years. The fair values are immediately in cumulative other comprehensive income. Ser- determined for comparative purposes using the discounted vice cost and interest cost are recognised in the statement of cash flow method. income. Returns on plan assets are determined using the same interest rate as that used in the calculation of the present value Other assets are accounted for at amortised cost. of the defined benefit obligation.

Technical reserves: the technical reserves are shown for gross Contributions to defined contribution plans are expensed when account in the balance sheet, i. e. before deduction of the share the beneficiary of the commitment has performed the work that attributable to our reinsurers; cf. here the remarks concerning entitles them to such contributions. the corresponding assets. The reinsurers’ portion is calculated and accounted for on the basis of the individual reinsurance Deferred tax liabilities: in accordance with IAS 12 “Income contracts. Taxes” deferred tax liabilities must be recognised if assets are to be recognised in a higher amount or liabilities in a lower Loss and loss adjustment expense reserves are constituted amount in the consolidated balance sheet than in the tax bal- for payment obligations from reinsurance losses that have ance sheet and if these temporary differences will lead to occurred but have not yet been settled. They are subdivided additional tax loads in the future; please see our explanatory into reserves for reinsurance losses reported by the balance remarks on deferred tax assets. sheet date and reserves for reinsurance losses that have already been incurred but not yet reported (IBNR) by the balance sheet Under the balance sheet item Other liabilities we recognise date. The loss and loss adjustment expense reserves are based not only the sundry non-technical provisions but also minority on estimates that may diverge from the actual amounts paya- interests in partnerships. Direct minority interests in partner- ble. In reinsurance business a considerable period of time may ships, i. e. liabilities to holders of minority shares in partner- elapse between the occurrence of an insured loss, notification ships arising out of long-term capital commitments, which are by the insurer and pro-rata payment of the loss by the rein- puttable at fair value by the holder of the interest, are recog- surer. For this reason the best estimate of the future settlement nised as debt pursuant to IAS 32 and measured at the fair amount is carried. With the aid of actuarial methods, the esti- value of the redemption amount as at the balance sheet date. mate makes allowance for past experience and assumptions relating to the future development. The interest rate-induced Sundry non-technical provisions are established according Annual financial statements portion of the change in the reserve is shown in the statement to the best estimate of the amount required and shown under of income on a consistent Group basis. the balance sheet item “Other liabilities”. Allocation to such provisions is conditional upon the Group currently having a Benefit reserves are comprised of the underwriting reserves legal or actual obligation that results from a past event and in for guaranteed claims of ceding companies in life and health respect of which utilisation is probable and the amount can reinsurance. Benefit reserves are determined using actuarial be reliably estimated. methods on the basis of the present value of future payments to cedants less the present value of premium still payable by Restructuring provisions are recognised if a detailed formal cedants. The calculation includes assumptions relating to plan for restructuring measures exists and steps to implement mortality, disability, lapse rates and the future interest rate it have already begun or if key details of the restructuring development. The actuarial bases used in this context allow have been published. The provisions cover only expenditures an adequate safety margin for the risks of change, error and arising directly as a consequence of restructuring that are not random fluctuation. They correspond to those used in the pre- connected with the company’s regular activities. mium calculation and are adjusted if the original safety margins no longer appear to be sufficient. Partial retirement obligations are carried at present value according to actuarial principles. During the phase when the Provisions for pensions are established in accordance with employee is still working a provision is set aside to cover the IAS 19 “Employee Benefits” using the projected unit credit liability amounting to the working hours not yet compensated. method. They are calculated according to actuarial principles Top-up payments are accumulated in instalments until the end and are based upon the commitments made by the Hannover of the work phase. In periods when the employee is remuner- Re Group for retirement, disability and widows’ benefits. The ated according to the partial retirement arrangements without amount of the commitments is determined according to length performing any work, the provision is released. of service and salary level. The pension plans are defined benefit plans. The basis of the valuation is the estimated future increase in the rate of compensation of the pension beneficiaries. The benefit entitlements are discounted by applying the

Hannover Re | Annual Report 2015 153 Share-based payment: The share-based payment models exist- Disclosures about financial instruments: IFRS 7 “Financial ing within the Hannover Re Group are remuneration plans with Instruments: Disclosures” requires more extensive disclosures cash settlement. In accordance with the requirements of IFRS 2 according to classes of financial instruments. In this context, “Share-based Payment”, the services rendered by the eligible the term “class” refers to the classification of financial instru- beneficiaries and the resulting liability are to be recognised ments according to their risk characteristics. A minimum dis- at the fair value of the liability and expensed over the vesting tinction is required here between measurement at amortised period. Until settlement of the liability the fair value of the lia- cost or at fair value. A more extensive or divergent distinction bility is remeasured at each closing date and at the settlement should, however, be geared to the purpose of the correspond- date. All changes in fair value are recognised in profit or loss ing disclosures in the notes. In contrast, the term “category” for the period. is used within the meaning of the measurement categories defined in IAS 39 “Financial Instruments: Recognition and Debt and subordinated capital principally consists of subor- Measurement” (held to maturity, loans and receivables, avail- dinated liabilities that can only be satisfied after the claims of able for sale and financial assets at fair value through profit or other creditors in the event of liquidation or bankruptcy. They loss with the subcategories of trading and designated finan- are measured at amortised cost using the effective interest rate cial instruments). Essentially, the following classes of financial method. Both components of profit or loss arising out of the instruments are established: amortisation of transaction costs and premiums / discounts in connection with an issue and the nominal interest are shown • Fixed-income securities as interest on hybrid capital. • Equities, equity funds and other variable-yield securities Financial liabilities at fair value through profit or loss: Han- • Other financial assets – at fair value through profit nover Re does not make use of the fair value option provided or loss by IAS 39 “Financial Instruments: Recognition and Measure- • Certain financial assets in the balance sheet item ment” to classify financial liabilities in this category upon first- “Real estate and real estate funds” time recognition. • Other invested assets • Short-term investments Shareholders’ equity: the items “common shares” and “addi- • Certain financial assets in the balance sheet item tional paid-in capital” are comprised of the amounts paid in “Other assets” by the shareholders of Hannover Rück SE on its shares. In • Certain financial assets in the balance sheet item addition to the statutory reserves of Hannover Rück SE and “Other liabilities” the allocations from net income, the retained earnings con- • Long-term debt sist of reinvested profits generated by the Hannover Re Group • Subordinated debt companies in previous periods. What is more, in the event of a retrospective change of accounting policies, the adjustment This grouping into classes is not, however, solely determina- for previous periods is recognised in the opening balance sheet tive for the type and structure of each disclosure in the notes. value of the retained earnings and comparable items of the ear- Rather, guided by the underlying business model of reinsur- liest reported period. Unrealised gains and losses from the fair ance, the disclosures are made on the basis of the facts and value measurement of financial instruments held as available circumstances existing in the financial year and in light of the for sale are carried in cumulative other comprehensive income principle of materiality. under unrealised gains and losses on investments. Translation differences resulting from the currency translation of sepa- Currency translation: financial statements of Group subsid- rate financial statements of foreign subsidiaries are recognised iaries were drawn up in the currencies corresponding to the under gains and losses from currency translation. economic environment in which each subsidiary primarily operates. These currencies are referred to as functional cur- Non-controlling interests are shares in the equity of affiliated rencies. The euro is the reporting currency in which the con- companies not held by companies belonging to the Group. solidated financial statement is prepared. IAS 1 “Presentation of Financial Statements” requires that non-controlling interests be recognised separately within Group shareholders’ equity. The non-controlling interest in profit or loss is shown separately following the net income. Fur- ther information is provided in Section 6.14 “Non-controlling interests”.

154 Hannover Re | Annual Report 2015 Transactions in foreign currencies reported in Group compa- The individual companies’ statements of income prepared in nies’ individual financial statements are converted into the the local currencies are converted into euro at the average functional currency at the transaction rate. In accordance with rates of exchange and transferred to the consolidated finan- IAS 21 “The Effects of Changes in Foreign Exchange Rates” the cial statement. The conversion of foreign currency items in the recognition of exchange differences on translation is guided by balance sheets of the individual companies and the transfer of the nature of the underlying balance sheet item. Exchange dif- these items to the consolidated financial statement are effected ferences from the translation of monetary assets and liabilities at the mean rates of exchange on the balance sheet date. In are recognised directly in the statement of income. Currency accordance with IAS 21 “The Effects of Changes in Foreign translation differences from the translation of non-monetary Exchange Rates” differences from the currency translation of assets measured at fair value via the statement of income are financial statements of foreign Group companies must be rec- recognised with the latter as profit or loss from fair value meas- ognised in the consolidated financial statement as a separate urement changes. Exchange differences from non-monetary item in shareholders’ equity. Currency translation differences items – such as equity securities – classified as available for resulting from long-term loans or lendings without specified sale are initially recognised outside income in a separate item maturity between Group companies are similarly recognised of shareholders’ equity and only booked to income when such outside the statement of income in a separate item of share- non-monetary items are settled. holders’ equity.

Key exchange rates N 08

1 EUR corresponds to: 31.12.2015 31.12.2014 2015 2014 Mean rate of exchange Average rate of exchange on the balance sheet date AUD 1.4981 1.4879 1.4840 1.4789 BHD 0.4122 0.4583 0.4197 0.4997 CAD 1.5158 1.4131 1.4241 1.4652 CNY 7.0970 7.5533 6.9934 8.1675 GBP 0.7381 0.7825 0.7289 0.8059 HKD 8.4692 9.4289 8.6269 10.2814 KRW 1,281.5964 1,333.7220 1,257.9722 1,395.8961

MYR 4.6929 4.2580 4.3356 4.3460 Annual financial statements SEK 9.1938 9.4845 9.3450 9.1143 USD 1.0927 1.2155 1.1128 1.3256 ZAR 16.8447 14.1409 14.2609 14.3566

Hannover Re | Annual Report 2015 155 Earned premium and unearned premium: assumed reinsur- Taxes: the taxes are comprised of the actual tax load on cor- ance premiums, commissions and claim settlements as well porate profits of the Group companies, to which the applica- as assumed portions of the technical reserves are recognised ble local tax rates are applied, as well as changes in deferred according to the terms and conditions of the reinsurance trea- tax assets and liabilities. Income and expenses arising out of ties, giving due consideration to the underlying contracts for interest or penalties payable to the revenue authorities are which reinsurance was taken out. shown under other income and expenses. The calculation of the deferred tax assets and liabilities is based on tax loss carry-for- Ceded reinsurance premiums are deducted from the gross wards, unused tax credits and temporary differences between written premium for the purpose of reconciliation to net pre- the book values of assets and liabilities in the consolidated mium earned. Assets and liabilities in connection with rein- balance sheet of the Hannover Re Group and their tax val- surance ceded are recognised on a gross basis. The reinsured ues. Further information on deferred taxes is provided in our portions of the reserves are estimated on a basis consistent remarks on deferred tax assets and liabilities. with the reserves attributable to the reinsured risk. Income and expenses in connection with reinsurance treaties are rec- Non-current assets held for sale and discontinued opera- ognised on a basis consistent with the underlying risk of the tions: in accordance with IFRS 5 “Non-current Assets Held reinsured business. for Sale and Discontinued Operations”, non-current assets and disposal groups are classified as held for sale if the relevant Premiums for reinsurance treaties are booked to income as book value is realised largely through sale rather than through earned across the period of the contracts in proportion to the continued use. Components of an entity that can be clearly insurance protection already provided or when they become distinguished from the rest of the entity for operational and due. Unearned premiums are calculated individually for each accounting purposes and were classified as sold or for sale treaty in order to establish the portion of the premium volume are recognised as discontinued operations. Measurement is at that is not booked to income. This applies principally to prop- the lower of book value and fair value less costs to sell. Sched- erty and casualty reinsurance and parts of accident and health uled depreciation is not taken on non-current assets classified reinsurance. Premiums already collected that are attributa- as held for sale. Impairment losses on fair value less costs to ble to future risk periods are deferred pro rata temporis and sell are recognised in profit or loss; a gain for any subsequent recognised in conformity with the pertinent standards of US increase in fair value less costs to sell leads to the realisation GAAP. In this context, assumptions are to be made if the data of profit up to the amount of the cumulative impairment. If the required for a calculation pro rata temporis is not available. impairment loss to be taken on a disposal group exceeds the The unearned premium corresponds to the insurance protec- book value of the corresponding non-current assets, the need to tion afforded in future periods. establish a provision within the meaning of IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” is reviewed.

3.3 Major discretionary decisions and estimates

In the consolidated financial statement it is to some extent triangles from the original notifications of ceding companies. necessary to make estimates and assumptions which affect In this context it is generally assumed that the future rate of the assets and liabilities shown in the balance sheet, the infor- inflation of the loss run-off will be analogous to the average mation on contingent claims and liabilities as at the balance rate of the past inflation contained in the data. The more recent sheet date and the disclosure of income and expenses dur- underwriting years in actuarial projections are of course sub- ing the reporting period. Key facts and circumstances subject ject to greater uncertainty, although this can be considerably to such assumptions and estimates include, for example, the reduced with the aid of a variety of additional information on recoverability of contingent reinsurance liabilities, the recover- improvements in the rates and conditions of the business writ- ability of investments in associated companies, the valuation of ten and on loss trends. The amounts arrived at as the difference derivative financial instruments as well as assets and liabilities between the ultimate losses and the reported losses are set relating to employee benefits. The actual amounts may diverge aside as the IBNR reserve for losses that have been incurred from the estimated amounts. but are not yet known or have still to be reported.

In order to measure the ultimate liability in property and By analysing a broad range of observable information it is pos- casualty reinsurance the expected ultimate loss ratios are sible to classify losses as major individual loss events. Measure- calculated for all lines. Actuarial methods such as the “chain ment of the obligations existing in this connection is carried out ladder” method provide the starting point for these calcula- using a separate process, which is based largely on contract- tions. The best possible estimated future settlement amount is specific estimates. recognised in the balance sheet. The development until completion of the run-off is projected on the basis of statistical

156 Hannover Re | Annual Report 2015 For further details, for example concerning the modelling of The projections, which cover various model scenarios (“con- natural catastrophe scenarios and the assumptions relating to servative assumptions” versus “best estimate”), constitute the asbestos and pollution risks, the reader is referred to our com- starting point for numerous areas of application encompassing ments in the risk report on page 83 et seq. We would further quotation, the determination of carrying amounts and embed- refer to our explanatory remarks on the technical reserves in ded values as well as contract-specific analyses, e. g. regarding Section 3.2 “Summary of major accounting policies” and Sec- the appropriateness of the recognised reinsurance liabilities tion 6.7 “Technical provisions”. (“liability adequacy test”). In this context we would refer the reader to our comments on technical assets and provisions in In life business, too, the calculation of reserves and assets is Section 3.2 “Summary of major accounting policies” and on the crucially dependent on actuarial projections of the covered liability adequacy tests in Section 6.7 “Technical provisions”. business. So-called model points are defined according to the type of business covered. The main distinguishing criteria are In determining the carrying amounts for certain financial assets the age, sex and (non-)smoker status of the insured, tariff, pol- it is sometimes necessary to make assumptions in order to icy period, period of premium payment and amount of insur- calculate fair values. In this regard we would refer the reader ance. The portfolio development is simulated for each model to our remarks in Section 3.2 “Summary of major accounting point, in which regard the key input parameters are either policies” concerning financial assets at fair value through profit predefined by the tariff (e. g. allowance for costs, amount of or loss and securities held as available for sale as well as in premium, actuarial interest rate) or need to be estimated (e. g. Section 6.1 “Investments under own management” concerning mortality or disability rates, lapse rates). These assumptions are investment property. Assumptions concerning the appropri- heavily dependent on country-specific parameters and on the ate applicability criteria are necessary when determining the sales channel, quality of the cedant’s underwriting and claims need for impairments on non-monetary financial assets held handling, type of reinsurance and other framework conditions as available for sale. In this regard we would again refer the of the reinsurance treaty. The superimposition of numerous reader to our explanatory remarks in Section 3.2 “Summary model points gives rise to a projection, which incorporates of major accounting policies”. inter alia assumptions concerning the portfolio composition and the commencement of covered policies within the year. Such assumptions are estimated at the inception of a reinsurance treaty and subsequently adjusted to the actual projection. Annual financial statements 4. Consolidation

4.1 Consolidation principles

Capital consolidation The capital consolidation is carried out according to the principles are also applied to structured entities, on which requirements of IFRS 10 “Consolidated Financial Statements” further information is provided in Section 4.2 “Consolidated on the basis of a consistent consolidation model for all enti- companies and complete list of shareholdings”. Group compa- ties that identifies control as the single basis for verifying the nies are consolidated until the Hannover Re Group loses con- consolidation requirement, irrespective of whether control is trol over them. The accounting policies of Group companies substantiated in company law, contractually or economically. are adjusted, where necessary, in order to ensure consistent Group companies are consolidated from the point in time when application of the Hannover Re Group’s accounting policies. Hannover Re gains control over them. Control exists if Han- nover Re directly or indirectly has decision-making power over The capital consolidation is based on the acquisition method. a Group company on the basis of voting rights or other rights, In the context of the acquisition method the acquisition costs, if it has exposure or rights to positive and negative variable measured at the fair value of the consideration rendered by returns from its involvement with the Group company and if it the parent company on the acquisition date, are netted with can use its power to influence these returns. All of these criteria the proportionate shareholders’ equity of the subsidiary at the must be met. Other circumstances may also give rise to control, time when it is first included in the consolidated financial state- for example the existence of a principal-agent relationship. ment after the revaluation of all assets and liabilities. After rec- In this case a party outside the Group with decision-making ognition of all acquired intangible assets that in accordance powers (agent) acts for Hannover Re, but does not control the with IFRS 3 “Business Combinations” are to be accounted for company since it merely exercises decision-making powers separately from goodwill, the difference between the revalued that have been delegated by Hannover Re (principal). These shareholders’ equity of the subsidiary and the purchase price is

Hannover Re | Annual Report 2015 157 recognised as goodwill. Under IFRS 3 scheduled amortisation over an associated company from representation on a govern- is not taken on goodwill. Instead, impairment is taken where ing body of such company, participation in its policy-making necessary on the basis of annual impairment tests. Immate- processes – e. g. with respect to dividends or other distribu- rial and negative goodwill are recognised in the statement of tions –, the existence of material inter-company transactions, income in the year of their occurrence. Costs associated with the possibility of interchanging managerial personnel or the acquisition are expensed. provision of key technical information for the company. Further particulars on companies consolidated using the equity method Companies over which Hannover Re is able to exercise a sig- of accounting are provided in Section 6.1 “Investments under nificant influence are consolidated as associated companies own management” under “Associated companies”. using the equity method of accounting. We therefore measure investments in associated companies with the proportion of the Only subsidiaries which are of minor importance – both indi- shareholders’ equity attributable to the Group. According to the vidually and in their entirety – for the net assets, financial posi- proportionate interest method required by IAS 28 “Investments tion and results of operations of the Hannover Re Group are in Associates”, the goodwill attributable to associated compa- exempted from consolidation. Hannover Re assesses whether nies is recognised together with the investments in associated a subsidiary is of minor importance on the basis of the compa- companies. The share of an associated company’s year-end ny’s total assets and net income relative to the corresponding profit or loss relating to the Group is included in the income values for the Group as a whole on average over the last three from investments and shown separately in the consolidated years. For this reason 18 (17) companies at home and abroad statement of income. Shareholders’ equity and profit or loss were not consolidated in the year under review. A further 12 are taken from the associated company’s latest available finan- (14) companies were not included at equity in the consolidated cial statement. A significant influence is presumed to exist if financial statement for the same reason. The business object of a company belonging to the Hannover Re Group directly or these altogether 30 (31) companies is for the most part the ren- indirectly holds at least 20% – but no more than 50% – of the dering of services for reinsurance companies within the Group. voting rights. We also derive evidence of significant influence

Consolidation of business transactions within the Group Receivables and liabilities between the companies included in Transactions between a disposal group and the continuing the consolidated financial statement were offset against each operations of the Group were similarly eliminated in accord- other. Profits and expenses from business transactions within ance with IFRS 10. the Group were also eliminated.

158 Hannover Re | Annual Report 2015 4.2 Consolidated companies and complete list of shareholdings

In addition to Hannover Rück SE as the parent company of the Group, the scope of consolidation of the Hannover Re Group encompasses the companies listed in the table below.

Information on subsidiaries

Scope of consolidation N 09

Number of companies 2015 2014 Consolidated companies (Group companies) Germany 25 18 Abroad 66 63 Total 91 81

Companies included at equity Germany 3 3 Abroad 7 8 Total 10 11

Information on the non-controlling interests in shareholders’ belonging to the Group. These limitations result principally equity and profit or loss as well as on the major non-con- from local minimum capital and solvency requirements as well trolling interests is provided in Section 6.14 “Non-controlling as to a lesser extent from foreign exchange restrictions. interests”. On the balance sheet date there were no significant restrictions on access to or the use of Group assets due to pro- As security for our technical liabilities and as collateral for tective rights in favour of non-controlling interests. liabilities arising out of existing derivative transactions Han- nover Re has established blocked custody accounts and trust The sale or transfer of shares of E+S Rückversicherung AG accounts in certain countries, while for liabilities in connection Annual financial statements takes place by way of an endorsement and is permissible only with real estate transactions – to the extent that is customary with the approval of the company’s Supervisory Board. The under such transactions – it has pledged assets in favour of Supervisory Board enjoys the right to grant or deny approval third parties outside the Group. For further information please unconditionally, without being obliged to state reasons in the see our explanatory remarks in Section 8.7 “Contingent liabil- event of denial. ities and commitments”.

National provisions of company law or requirements of supervisory law may in certain countries limit the ability of the Hannover Re Group to transfer assets between companies

List of shareholdings The following list of shareholdings is provided in full in the With regard to the major acquisitions and disposals in the year present Group annual financial report in accordance with under review please see our remarks in the following para- § 313 Para. 2 German Commercial Code (HGB) as amended graphs of this section. by the Act on the Modernisation of Accounting Law (BilMoG). The stipulations of IFRS 12.10 and IFRS 12.21 have also been observed.

The figures for the capital and reserves as well as the result for the last financial year are taken from the local financial statements drawn up by the companies.

Hannover Re | Annual Report 2015 159 List of shareholdings N 10

Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Domestic companies Affiliated consolidated companies Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover / Germany 1, 2 100.00 EUR 2,341,925 – Hannover Life Re AG, Hannover / Germany 1, 2 100.00 EUR 1,873,188 – HILSP Komplementär GmbH, Hannover / Germany 3 100.00 EUR 30 3 International Insurance Company of Hannover SE, Hannover / Germany 1, 2 100.00 EUR 166,571 – Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover / Germany 3 100.00 EUR 20,348 124 FUNIS GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 59,749 3,477 HR Verwaltungs-GmbH, Hannover / Germany 1 100.00 EUR 12 – Erste HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 – Zweite HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 – Dritte HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 – Vierte HRBV GmbH & Co. KG, Hannover / Germany 1 100.00 EUR 152,865 – Hannover America Private Equity Partners II GmbH & Co. KG, Hannover / Germany 1 95.42 EUR 222,380 37,760 HAPEP II Holding GmbH, Hannover / Germany 1 95.42 EUR 19,878 9,277 Hannover Re Global Alternatives GmbH & Co KG, Hannover / Germany 1 94.72 EUR 34,370 (498) Hannover Re Euro PE Holdings GmbH & Co. KG, Hannover / Germany 1 91.20 EUR 210,787 2,787 Hannover Re Euro RE Holdings GmbH, Hannover / Germany 1 87.68 EUR 854,859 12,400 HR GLL Central Europe GmbH & Co. KG, Munich / Germany 1 87.67 EUR 335,844 2,569 HR GLL Central Europe Holding GmbH, Munich / Germany 1 87.67 EUR 61,835 48 HAPEP II Komplementär GmbH, Hannover / Germany 1 82.40 EUR 36 5 Hannover Euro Private Equity Partners III GmbH & Co. KG, Cologne / Germany 1 67.54 EUR 32,139 9,248 HEPEP III Holding GmbH, Cologne / Germany 1 67.54 EUR 11,423 5,067 E+S Rückversicherung AG, Hannover / Germany 1 64.79 EUR 681,413 110,000 Hannover Euro Private Equity Partners IV GmbH & Co. KG, Cologne / Germany 1 60.58 EUR 46,160 16,892 Hannover Euro Private Equity Partners II GmbH & Co. KG, Cologne / Germany 1 57.89 EUR 6,918 1,826 HEPEP II Holding GmbH, Cologne / Germany 1 57.89 EUR 4,727 1,445

160 Hannover Re | Annual Report 2015 Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Affiliated non-consolidated companies International Hannover Holding AG, Hannover / Germany 4, 5 100.00 EUR 39 (2) Associated companies Oval Office Grundstücks GmbH, Hannover / Germany 50.00 EUR 2,061 16,008 WeHaCo Unternehmensbeteiligungs-GmbH, Hannover / Germany 6 32.96 EUR 81,351 4,533 HANNOVER Finanz GmbH, Hannover / Germany 6 27.78 EUR 69,477 6,032 Other participations b2b protect GmbH, Hildesheim / Germany 6 48.98 EUR 253 (214) Foreign companies Affiliated consolidated companies Hannover Finance (Luxembourg) S.A., Luxembourg / Luxembourg 1 100.00 EUR 34,359 (4,994) Hannover Finance (UK) Limited, London / United Kingdom 1 100.00 GBP 2,718 (16) Hannover Life Reassurance Bermuda Ltd., Hamilton / Bermuda 1 100.00 USD 392,068 57,216 Hannover Life Reassurance Company of America, Orlando / USA 1 100.00 USD 229,495 16,662 Hannover Life Reassurance Company of America (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 USD 6,699 1,752 Hannover Re (Ireland) Limited, Dublin / Ireland 1 100.00 EUR 1,549,326 105,470

Hannover Life Re of Australasia Ltd, Annual financial statements Sydney / Australia 1 100.00 AUD 476,201 3,552 Hannover Re (Bermuda) Ltd., Hamilton / Bermuda 1 100.00 USD 1,236,561 226,765 Hannover ReTakaful B.S.C. (c), Manama / Bahrain 1 100.00 BHD 60,631 2,859 Hannover Services (UK) Limited, London / United Kingdom 1 100.00 GBP 860 148 Inter Hannover (No.1) Limited, London / United Kingdom 1 100.00 GBP – – Leine Investment General Partner S.à r.l., Luxembourg / Luxembourg 1, 7 100.00 EUR 38 530 Leine Investment SICAV-SIF, Luxembourg / Luxembourg 1, 7 100.00 USD 112,717 (5,616) LI RE, Hamilton / Bermuda 7 100.00 USD – – Fracom FCP, Paris / France 8 100.00 EUR 1,150,911 23,070 Hannover Finance, Inc., Wilmington / USA 1, 7 100.00 USD 438,123 8,194 Atlantic Capital Corporation, Wilmington / USA 4, 7 100.00 USD (111,867) – Sand Lake Re, Inc., Burlington / USA 9 100.00 USD – – Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg / South Africa 1 100.00 ZAR 209,905 206,410 Hannover Life Reassurance Africa Limited, Johannesburg / South Africa 1 100.00 ZAR 576,793 122,119

Hannover Re | Annual Report 2015 161 Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Hannover Reinsurance Africa Limited, Johannesburg / South Africa 1 100.00 ZAR 723,659 109,105 Compass Insurance Company Limited, Johannesburg / South Africa 1 100.00 ZAR 161,473 29,252 Micawber 185 (Pty) Ltd., Johannesburg / South Africa 100.00 ZAR 14,174 2,794 Peachtree (Pty) Ltd., Johannesburg / South Africa 4, 6 100.00 ZAR – – Hannover Reinsurance Mauritius Ltd., Port Louis / Mauritius 100.00 MUR 40,240 (4,576) Hannover Re Real Estate Holdings, Inc., Orlando / USA 7 95.25 USD 588,536 26,199 GLL HRE CORE Properties, L.P., Wilmington / USA 1, 7 95.15 USD 422,384 7,362 11 Stanwix, LLC, Wilmington / USA 1, 7 95.15 USD 36,462 752 402 Santa Monica Blvd, LLC, Wilmington / USA 1, 7 95.15 USD 1,852 704 300 California, LLC, Wilmington / USA 10 95.15 USD – – 111ORD LLC, Wilmington / USA 1, 7 95.15 USD 76,761 1,166 140EWR LLC, Wilmington / USA 1, 7 95.15 USD 81,391 (347) 7550IAD, LLC, Wilmington / USA 1, 7 95.15 USD 76,427 550 300 South Orange Avenue, LLC, Orlando / USA 1, 7 95.15 USD 249 (43) Nashville West, LLC, Wilmington / USA 1, 7 95.15 USD 29,953 496 1225 West Washington, LLC, Wilmington / USA 1, 7 95.15 USD 23,812 1,165 975 Carroll Square, LLC, Wilmington / USA 1, 7 95.15 USD 54,389 1,818 Broadway 101, LLC, Wilmington / USA 1, 7 95.15 USD 11,892 356 River Terrace Parking, LLC, Wilmington / USA 1, 7 95.15 USD 20,664 (7) Commercial & Industrial Acceptances (Pty) Ltd., Johannesburg / South Africa 88.00 ZAR 4,669 24,061 Kaith Re Ltd., Hamilton / Bermuda 1 88.00 USD 241 (176) HR GLL Roosevelt Kft, Budapest / Hungary 1 87.67 HUF 19,188,054 1,820,616 HR GLL Liberty Corner SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 48,411 (78) HR GLL Griffin House SPÓLKA Z OGRANICZONA ODPOWIEDZIALNÓSCIA, Warsaw / Poland 1 87.67 PLN 38,359 (1,103) Akvamarín Beta s.r.o., Prague / Czech Republic 1 87.67 CZK 100,919 41,363 HR GLL Europe Holding S.à r.l., Luxembourg / Luxembourg 1 87.67 EUR 165,908 (25) HR GLL CDG Plaza S.r.l., Bucharest / Romania 1 87.67 RON 184,636 5,271 Pipera Business Park S.r.l., Bucharest / Romania 1 87.67 RON 40,341 7,577

162 Hannover Re | Annual Report 2015 Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Mustela s.r.o., Prague / Czech Republic 1 87.67 CZK 1,267,889 27,767 Integra Insurance Solutions Limited, Bradford / United Kingdom 6 74.99 GBP 2,841 2,622 Lireas Holdings (Pty) Ltd., Johannesburg / South Africa 70.00 ZAR 192,524 17,375 Transit Underwriting Managers (Pty) Ltd., Cape Town / South Africa 63.00 ZAR 1,114 1,174 MUA Insurance Acceptances (Pty) Ltd., Cape Town / South Africa 56.00 ZAR 8,016 3,919 Cargo Transit Insurance (Pty) Ltd., Helderkruin / South Africa 4, 11 56.00 ZAR (4,499) – Svedea AB, Stockholm / Sweden 6 53.00 SEK 5,494 (8,482) Landmark Underwriting Agency (Pty) Ltd., Bloemfontein / South Africa 52.85 ZAR 3,523 1,713 Hospitality Industrial and Commercial Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 50.54 ZAR 1,284 4,344 SUM Holdings (Pty) Ltd., Johannesburg / South Africa 50.54 ZAR 23,117 5,310 Firedart Engineering Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 49.00 ZAR 484 2,287 Garagesure Consultants and Acceptances (Pty) Ltd., Johannesburg / South Africa 49.00 ZAR 1,377 2,010 Thatch Risk Acceptances (Pty) Ltd., Johannesburg / South Africa 45.49 ZAR 1,498 1,265 Construction Guarantee (Pty) Ltd., Johannesburg / South Africa 4, 11 42.00 ZAR – – Woodworking Risk Acceptances (Pty) Ltd., Annual financial statements Johannesburg / South Africa 4, 12 42.00 ZAR – (42) Envirosure Underwriting Managers (Pty) Ltd., Durban / South Africa 35.70 ZAR 1,180 979 Synergy Targeted Risk Solutions (Pty) Ltd, Johannesburg / South Africa 35.70 ZAR 2,042 62 Film & Entertainment Underwriters SA (Pty) Ltd., Johannesburg / South Africa 35.70 ZAR (1,292) 668 Affiliated non-consolidated companies International Mining Industry Underwriters Limited, London / United Kingdom 1 100.00 GBP 208 49 HR Hannover Re, Correduría de Reaseguros, S.A., Madrid / Spain 1 100.00 EUR 377 36 LRA Superannuation Plan Pty Ltd., Sydney / Australia 10 100.00 AUD – – Mediterranean Reinsurance Services Ltd., Hong Kong / China 1, 4 100.00 USD 52 – Hannover Re Services Japan, Tokyo / Japan 1 100.00 JPY 102,461 4,677 Hannover Re Consulting Services India Private Limited, Mumbai / India 13 100.00 INR 91,270 11,768 Hannover Life Re Consultants, Inc., Orlando / USA 100.00 USD 173 (27) Hannover Services (México) S.A. de C.V., Mexico City / Mexico 6 100.00 MXN 8,934 (612) Hannover Re Services USA, Inc., Itasca / USA 100.00 USD 3,504 26

Hannover Re | Annual Report 2015 163 Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Hannover Rück SE Escritório de Representação no Brasil Ltda., Rio de Janeiro / Brazil 6 100.00 BRL 2,440 357 L & E Holdings Limited, London / United Kingdom 1 100.00 GBP 5 – London & European Title Insurance Services Limited, London / United Kingdom 1 100.00 GBP 372 123 Hannover Re Risk Management Services India Private Limited, New Delhi / India 13 100.00 INR 52,226 15,774 Hannover Re Services Italy S.r.l., Milan / Italy 99.65 EUR 465 105 U FOR LIFE SDN.BHD., Kuala Lumpur / Malaysia 6 60.00 MYR (1,140) (1,190) HMIA Pty Ltd, Sydney / Australia 6 55.00 AUD (128) (128) Svedea Skadeservice AB, Stockholm / Sweden 14 53.00 SEK – – Associated companies Glencar Underwriting Managers, Inc., Chicago / USA 6 88.20 USD 5,778 1,875 ITAS Vita S.p.A., Trient / Italy 6 34.88 EUR 94,147 8,353 Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 26.11 ZAR 19,144 21,730 Clarenfin (Pty) Ltd., Johannesburg / South Africa 26.11 ZAR 156 (15) Camargue Underwriting Managers (Pty) Ltd., Johannesburg / South Africa 25.79 ZAR 12,955 6,593 Synergy XOL (Pty) Ltd., Johannesburg / South Africa 25.79 ZAR 332 648 Vela Taxi Finance (Pty) Ltd, Johannesburg / South Africa 14.36 ZAR (1,270) (1,045) Other participations Energi, Inc., Peabody / USA 6 28.50 USD 21,076 1,537 Energi Insurance Services, Inc., Peabody / USA 6 28.50 USD 733 2,362 Energi of Canada Ltd., Toronto / Canada 6 28.50 CAD 1 (253) Energi Re, LLC, Wilmington / USA 6 28.50 USD 16,570 1,278 Hurst Holme Insurance Company Limited – account 2006 – 03 SCC, Hamilton / Bermuda 4, 6 28.50 USD 229 (69) Hurst Holme Insurance Company Limited – account 2009 – 01 SCC, Hamilton / Bermuda 4, 6 28.50 USD (27) (545) XS Direct Holdings Limited, Dublin / Ireland 6 25.00 EUR 2,049 44 SimShare Limited, Dublin / Ireland 6 25.00 EUR 633 – XS Direct Insurance Brokers Limited, Dublin / Ireland 6 25.00 EUR 226 114 New PF Limited, Dublin / Ireland 4, 6 25.00 EUR (6) – Meribel Topco Limited, St. Helier / Jersey 1 20.11 EUR 2,725 (79)

164 Hannover Re | Annual Report 2015 Name and registered office of the company Participation Currency Capital and Result for the in % reserves last financial in currency units of 1,000 year Meribel Midco Limited, St. Helier / Jersey 1 20.11 EUR 131,725 15,199 Iconica Business Services Limited, Bradford / United Kingdom 6 18.75 GBP (362) 100 Acte Vie S.A. Compagnie d’ Assurances sur la Vie et de Capitalisation, Strasbourg / France 6 9.38 EUR 8,996 254

1 Provisional (unaudited) figures 2 Year-end result after profit transfer 3 Financial year as at 30 September 2015 4 Company is in liquidation 5 Abbreviated financial year from 1 January 2015 to 30 June 2015 6 Figures as at 31 December 2014 7 IFRS figures 8 Financial year as at 31 October 2015 9 Company was newly established in 2015; an annual financial statement is not yet available. 10 Company is inactive 11 Figures as at 31 December 2013 12 Abbreviated financial year from 1 January 2015 to 31 July 2015 13 Financial year as at 31 March 2015 14 Start of business operations at 1 January 2015, an annual financial statement is not yet available. Annual financial statements

Hannover Re | Annual Report 2015 165 Consolidation of structured entities Business relations with structured entities are to be examined In accordance with the consistent consolidation model, a struc- in accordance with IFRS 10 with an eye to their implications tured entity – just like a subsidiary – must be consolidated if for consolidation. In the context of their operational activities Hannover Re gains control over the said entity. With regard to some companies belonging to the Hannover Re Group enter the criteria for control please see also Section 4.1 “Consolida- into business relations with structured entities that are to be tion principles”. Within the Hannover Re Group the require- analysed and accounted for according to these new provisions. ment to consolidate structured entities is examined as part of an analysis that encompasses both transactions in which a Structured entities are entities designed in such a way that structured entity is initiated by us with or without the involve- voting or similar rights are not the dominant factor in deciding ment of third parties and those in which we enter into contrac- who controls the entity, such as when any voting rights relate to tual relations with an already existing structured entity with or administrative tasks only and the relevant activities are directed without the involvement of third parties. Consolidation deci- by means of contractual arrangements. A structured entity fre- sions are reviewed as necessary and at least once a year. The quently has some or all of the following features or attributes: list of all consolidated structured entities forms part of the list of shareholdings. • Restricted activities; • A narrow and well-defined business objective; • Insufficient equity to allow it to finance its activities without subordinated financial support; • Financing in the form of multiple contractually linked instruments issued to investors that create concentrations of credit or other risks (tranches).

Consolidated structured entities The following structured entities were consolidated as at the LI RE is a segregated account of Kaith Re Ltd., the purpose of balance sheet date: which – as with all segregated accounts under Kaith Re Ltd. – is the securitisation of underwriting risks. In contrast to the • Kaith Re Ltd., Hamilton, Bermuda other segregated accounts, the sole investor and hence the risk • LI RE, Hamilton, Bermuda carrier of LI RE is Hannover Re.

Kaith Re Ltd. is a so-called segregated accounts company As at the balance sheet date Hannover Re had not rendered any (SAC), the sole object of which is the securitisation of rein- financial or other support for a consolidated structured entity. surance risks in the form of investment products. Under this Hannover Re does not intend to render financial or other sup- transformation a complete underwriting risk transfer always port for one or more of such entities without being contractu- takes place to the investor in question. In a SAC further seg- ally required to do so. regated accounts exist under a general account; it is in these segregated accounts, which for liability purposes are entirely separate from one another and from the general account, that the aforementioned securitisations take place for the investors.

Pursuant to IFRS 10 we consider the general account and the segregated accounts to be separate units to which the principles of so-called “silo accounting” are applied. In accordance with this concept, Hannover Re is required to consolidate the general account of Kaith Re Ltd. and is contractually responsible for the fees due to external service providers that are to be covered from the general account’s own funds. Each individual segregated account is to be examined separately by the parties concerned (investors) with an eye to a consolidation requirement and is to be consolidated according to the particular contractual arrangements in each case.

166 Hannover Re | Annual Report 2015 Unconsolidated structured entities The business relations of Hannover Re Group companies with structured entities set out below do not give rise to consolidation because the criteria for control pursuant to IFRS 10 contained in our consolidation principles are not met.

Investing activities and investments in catastrophe bonds (ILS) Within the scope of its investment activities Hannover Re Hannover Re participates through its subsidiary Leine Invest- has participated since 1988 inter alia in numerous struc- ment SICAV-SIF, Luxembourg, in a number of structured tured entities. These are predominantly special purpose enti- entities that issue catastrophe bonds for the securitisation of ties in the form of funds, which for their part transact certain catastrophe risks by investing in such bonds. Leine Investment types of equity and debt capital investments. These invest- General Partner S.à r.l. is the managing partner of the asset ments encompass private equity funds, fixed income funds, management company Leine Investment SICAV-SIF, the busi- collateralised debt obligations, real estate funds, index funds ness object of which is to build, hold and manage a portfolio of and other public funds. The volume of these transactions is insurance-linked securities (catastrophe bonds) – including for derived from the book values of the respective investments third-party investors outside the Group. The volume of these and amounted to EUR 2,893.3 million (EUR 2,489.4 million) transactions is derived from the book values of the respective as at the balance sheet date. The maximum risk of loss corre- investments and amounted to EUR 108.3 million (EUR 50.3 mil- sponds to the book values. lion) as at the balance sheet date. The maximum risk of loss corresponds to the book values.

Retrocession and securitisation of reinsurance risks The securitisation of reinsurance risks is largely structured By way of its “K” transactions Hannover Re has raised under- through the use of structured entities. writing capacity for catastrophe risks on the capital market. The “K Cession”, which was placed with investors in North In 2012 Hannover Re issued a catastrophe bond for the pur- America, Europe and Asia, involves a quota share cession on pose of transferring to the capital market peak natural catastro- worldwide natural catastrophe business as well as aviation and phe exposures deriving from European windstorm events. marine risks. Of the total volume of the “K Cession” amounting The term of the CAT bond, which has a volume of nominally to EUR 362.2 million, an amount equivalent to EUR 304.0 mil- EUR 100.0 million, runs until 31 March 2016; it was placed with lion (EUR 169.2 million) was securitised via structured entities Annual financial statements institutional investors from Europe, North America and Asia by as at the balance sheet date. The transaction has an indefinite Eurus III Ltd. Eurus III Ltd. is a special purpose entity domiciled term and can be cancelled annually by the investors. Segre- in Hamilton / Bermuda that was registered in August 2012 as gated accounts of Kaith Re Ltd. are used for transformer pur- a “special purpose insurer” under the Bermuda Insurance Act poses for part of this transaction. Hannover Re also uses further 1978. The retrocession contract concluded with the special pur- segregated accounts of Kaith Re Ltd. and other structured enti- pose entity under the transaction affords Hannover Rück SE, ties outside the Group for various retrocessions of both its E+S Rückversicherung AG and Hannover Re (Bermuda) Ltd. traditional and ILS covers, which in each case are passed on protection against the aforementioned catastrophe risks. The to institutional investors in securitised form. The volume of aforementioned volume of the transaction is measured by the these transactions is measured by the ceded exposure limit ceded exposure limit of the retrocession contract. The struc- of the underlying retrocession agreements and amounted to tured entity is fully funded by contractually defined investments altogether EUR 1,872.6 million (EUR 847.9 million) as at the in the form of cash and equivalent liquid assets. Given that the balance sheet date. The structured entities are in all cases fully maximum liability of the structured entity is therefore wholly funded by contractually defined investments in the form of cash collateralised, there is no risk of loss for Hannover Re. and equivalent liquid assets. Given that the entire exposure limit of the structured entities is therefore wholly collateralised in each case, there is no risk of loss for Hannover Re.

Hannover Re | Annual Report 2015 167 Collateralised fronting (ILS) As part of its extended Insurance-Linked Securities (ILS) maximum risk of loss from these transactions is derived from activities, Hannover Re has concluded so-called collateralised the uncollateralised exposure limit and the credit risk of the col- fronting arrangements under which risks assumed from ceding lateral and amounted to EUR 2,779.9 million (EUR 1,942.4 mil- companies are passed on to institutional investors outside the lion) as at the balance sheet date. This does not, however, Group using structured entities. The purpose of such trans- correspond to the economic risk of loss, which is established actions is to directly transfer clients’ business. The volume using recognised actuarial methods. The expected loss on of the transactions is derived from the ceded exposure limit a modelled basis in a worst-case scenario of 10,000 years of the underlying retrocession agreements and amounted to amounts to at most EUR 50.0 million (EUR 50.0 million). EUR 4,701.0 million (EUR 3,135.3 million) as at the balance sheet date. Part of the ceded exposure limit is funded and col- The book values of the assets and liabilities from the specified lateralised by contractually defined investments in the form of transactions with unconsolidated structured entities were as cash and equivalent liquid assets, while a further part remains follows as at the balance sheet date. uncollateralised or is collateralised by less liquid assets. The

Book values from business relations with unconsolidated structured entities N 11

31.12.2015 General investing Investment in ca- Retrocession: activities tastrophe bonds (ILS) securitisations and in EUR thousand ILS transactions Assets Fixed-income securities – held to maturity 968 – – Fixed-income securities – loans and receivables 16,357 – – Fixed-income securities – available for sale 1,628,911 – – Fixed-income securities – at fair value through profit or loss – 108,273 – Equity securities – available for sale 139,745 – – Real estate and real estate funds 371,254 – – Other invested assets 717,253 – – Short-term investments 18,763 – – Reinsurance recoverables on unpaid claims – – 137,892 Prepaid reinsurance premium – – 29,869 Accounts receivable – – 188 Total assets 2,893,251 108,273 167,949

Liabilities Reinsurance payable – – 32,256 Total liabilities – – 32,256

168 Hannover Re | Annual Report 2015 Book values from business relations with unconsolidated structured entities N 12

31.12.2014 General investing Investment in Retrocession: activities catastrophe bonds securitisations and in EUR thousand (ILS) ILS transactions Assets Fixed-income securities – held to maturity 491 – – Fixed-income securities – loans and receivables 19,401 – – Fixed-income securities – available for sale 951,578 – – Fixed-income securities – at fair value through profit or loss – 50,344 – Equity securities – available for sale 13,283 – – Real estate and real estate funds 320,956 – – Other invested assets 1,153,878 – – Short-term investments 29,824 – – Reinsurance recoverables on unpaid claims – – 124,048 Prepaid reinsurance premium – – 22,514 Accounts receivable – – 13,371 Total assets 2,489,411 50,344 159,933

Liabilities Reinsurance payable – – 28,837 Total liabilities – – 28,837

The income and expenses from business relations with uncon- With regard to commitments and obligations that we do not solidated structured entities are shown in investment income consider to be support, particularly outstanding capital com- insofar as they result from general investment activities or mitments from special investments, please see our remarks in investments in catastrophe bonds and are recognised in the Section 8.7 “Contingent liabilities and commitments”. Annual financial statements technical account insofar as they are attributable to retrocessions and securitisations.

As at the balance sheet date Hannover Re had not rendered any financial or other support for an unconsolidated structured entity. Hannover Re does not intend to render financial or other support for one or more of such entities without being contractually required to do so.

Life and health reinsurance assumed Some transactions in the life and health reinsurance segment Rather, these business relations correspond to regular ced- are effected with the involvement of ceding special purpose ant-reinsurer relations and are therefore not the subject of this entities as contracting parties that are established by parties disclosure. Some of the transactions include features that are outside the Group and from which member companies of the to be classified as financial guarantees. For the corresponding Hannover Re Group assume certain underwriting and / or finan- disclosures please see our remarks in Section 8.1 “Derivative cial risks. Given that the risks from such transfer transactions financial instruments and financial guarantees”. are entirely recognised in the technical / non-technical account of the Hannover Re Group, it is immaterial whether the active reinsurance business is assumed from structured or other entities. Although Hannover Re is exposed to variable returns from the business relations with such entities, these are independent of the purpose and design of the respective structured entity.

Hannover Re | Annual Report 2015 169 4.3 Major acquisitions and new formations

All the shares of a new special purpose property company were Hannover Rück SE and E+S Rückversicherung AG, both limited acquired in the 2015 financial year through HR GLL Central partners, hold interests of 85% and 15% respectively in the Europe GmbH & Co. KG, Munich, a subsidiary of Hannover Re company. The personally liable partner is HAPEP II Komple- Euro RE Holdings GmbH, Hannover. The business object of mentär GmbH, also based in Hannover. The business object the company is to hold and manage one property. The prop- of the company is to build, hold and manage a portfolio of erty was acquired on 30 October 2015 for a purchase price investments. of EUR 103.8 million. No contingent liabilities or conditional payments as defined by IFRS 3 were identified. Within our subgroup Hannover Reinsurance Group Africa (Pty) Ltd, Johannesburg, South Africa (“HRGSA”), Compass Insur- In August 2015 the Group company Hannover Life Reassur- ance Company Ltd, Johannesburg, acquired 60% of the shares ance Company of America, Orlando, United States, established in and hence control over Commercial & Industrial Acceptances Sand Lake Re, Inc., the registered office of which is located in (Pty) Ltd, Johannesburg (“CIA”), effective 1 January 2015 in Burlington, Vermont, United States. The business object of the the form of a business combination made in stages for the company, which is wholly owned by Hannover Life Reassur- purpose of securing the insurance portfolio mediated by the ance Company of America, is to transact reinsurance business company. CIA had previously already been included in the sub- and conduct associated activities. The company was registered group financial statement of HRGSA using the equity method on 14 August 2015, but had not yet commenced its business of accounting because 40% of its shares were held by Lireas operations as at the balance sheet date. Holdings (Pty) Ltd, Johannesburg. The purchase price was equivalent to EUR 3.6 million and included contingent con- Within the 95.1%-owned US subgroup Hannover Re Real siderations. Within the scope of initial consolidation intangible Estate Holdings, Inc., all the shares in each of three special assets in the form of customer relationships were identified purpose property companies were acquired in the second and with a value of EUR 5.3 million. The goodwill from this busi- fourth quarters of 2015 via the subsidiary GLL HRE Core Prop- ness combination amounts to EUR 1.8 million. In a similar erties, LP, Wilmington. The business object of the companies transaction Lireas Holdings (Pty) Ltd increased its interest is to hold and manage one property each. The properties were in Firedart Engineering Underwriters Managers Proprietary acquired on 1 and 24 July as well as on 23 November 2015 for Limited (“Firedart”), which had previously been consolidated a purchase price equivalent to altogether EUR 207.5 million. using the equity method, by 16.2% to altogether 70% and No contingent liabilities or conditional payments as defined assumed control over the company effective 28 November by IFRS 3 were identified. 2015. The purchase price was equivalent to EUR 0.2 million. Within the scope of initial consolidation intangible assets in the The company Hannover Re Global Alternatives GmbH & Co KG form of customer relationships were identified with a value of was established in March 2015 with its registered office in EUR 0.7 million. The goodwill from this business combination Hannover, Germany, and has been included in the consolidated provisionally amounts to EUR 0.6 million. financial statement with effect from the first quarter of 2015.

4.4 Major disposals and retirements

After its business had already been completely wound up in the option on the part of the majority shareholder became exercis- previous year, Hannover Re PCC (Guernsey) Ltd., a so-called able. Hannover Re consequently lost its significant influence protected cell company under the “Protected Cell Companies over the company, as a result of which recognition using the Ordinance 1997”, was liquidated effective 9 July 2015 and equity method ended. The company was carried under other removed from the Guernsey Registry. participations until the shares were returned to the majority shareholder on 4 May 2015. By means of a dividend resolution of 25 March 2015 of ASPECTA Assurance International AG, Vaduz, Liechtenstein, which had hitherto been included in the consolidated financial statement using the equity method of accounting, a purchase

170 Hannover Re | Annual Report 2015 4.5 Other corporate changes

Effective 3 July 2015 Hannover Reinsurance Africa Limited, The Group company Hannover Re (Ireland) Limited, Dublin, Johannesburg, South Africa, a subsidiary of our subgroup Han- Ireland, established a branch in Canada in February 2015. The nover Reinsurance Group Africa (Pty) Ltd., acquired further Toronto-based branch trades under the name Hannover Re shares in Lireas Holdings (Pty) Ltd., also based in Johannes- (Ireland) Limited Canadian Life Branch and was registered burg, for a purchase price equivalent to EUR 2.5 million from on 26 February 2015. The business object of the branch is to a third party outside the Group. Through an increase of 19.0% transact life and health reinsurance business. in its shareholding with no change of control status Hannover Reinsurance Africa Limited held 70.0% of the shares in Lireas The registered office of the Group company International Insur- Holdings upon closing of the transaction. The effects of the ance Company of Hannover SE, London (“Inter Hannover SE”), change in participating interest were recognised in the consol- was relocated from the United Kingdom to Hannover, Germany. idated financial statement as an equity transaction in accord- Inter Hannover SE received approval to commence insurance ance with IFRS 10. operations in Germany and was entered in the commercial register in January 2015.

5. Segment reporting

Based on the “management approach” of IFRS 8, which During the financial year no material changes occurred in the requires segment information to be presented as it is reported organisational structure that could have influenced the com- internally to management and normally used by the chief oper- position of the segments. Since the performance indicators ating decision maker to decide upon the allocation of resources used to steer the segments correspond to the system according to a segment and evaluate its performance, Hannover Re has to which the consolidated financial statement is prepared, a identified the reportable segments of property & casualty rein- separate reconciliation of the segment results with the Group surance and life & health reinsurance. With regard to the object result is not provided. of business operations within the two segments please see the corresponding remarks in the management report. Hannover Re Global Alternatives GmbH & Co. KG, Hannover, Germany, the special purpose property companies acquired in Annual financial statements The segment information shown follows the system used for the United States and Europe through GLL HRE Core Proper- internal reporting purposes, on the basis of which the full Exec- ties, LP, Wilmington, and HR GLL Central Europe GmbH & Co. utive Board regularly evaluates the performance of segments KG, Munich, respectively, the companies Commercial & Indus- and decides on the allocation of resources to them. trial Acceptances (Pty) Ltd. and Firedart Engineering Under- writing Managers Proprietary Limited, both Johannesburg, The “Consolidation” column includes not only the elimination South Africa, which were consolidated for the first time in the of cross-segment transactions but also, more significantly, com- year under review in the Hannover Reinsurance Group Africa as panies whose business operations cannot be unambiguously well as Hannover Re PCC (Guernsey) Ltd., St Peter Port, Guern- allocated to property and casualty reinsurance or life and health sey, which was liquidated in the third quarter, are allocated to reinsurance. These are principally the service and financing the property and casualty reinsurance segment. Sand Lake Re, companies belonging to the Group. Inc., Burlington, United States, which was newly established in the third quarter, is allocated to the life and health reinsurance segment.

Hannover Re | Annual Report 2015 171 Consolidated segment report as at 31 December 2015 N 13

Segmentation of assets Property and casualty reinsurance Life and health reinsurance Consolidation Total in EUR thousand 31.12.2015 31.12.2014 31.12.2015 31.12.2014 31.12.2015 31.12.2014 31.12.2015 31.12.2014 Assets Fixed-income securities – held to maturity 810,256 1,841,982 163,890 179,209 33,519 118,551 1,007,665 2,139,742 Fixed-income securities – loans and receivables 2,807,317 2,912,110 62,548 76,077 – – 2,869,865 2,988,187 Fixed-income securities – available for sale 21,779,850 19,822,832 7,598,153 6,639,186 238,445 355,505 29,616,448 26,817,523 Equity securities – available for sale 452,108 32,804 – – – – 452,108 32,804 Financial assets at fair value through profit or loss 110,836 63,648 37,748 54,262 – 12,978 148,584 130,888 Other invested assets 3,236,748 2,644,817 109,574 123,922 177 1,945 3,346,499 2,770,684 Short-term investments 273,208 242,463 839,122 332,262 800 575 1,113,130 575,300 Cash 609,914 580,490 177,537 186,224 5,153 6,168 792,604 772,882 Total investments and cash under own management 30,080,237 28,141,146 8,988,572 7,591,142 278,094 495,722 39,346,903 36,228,010 Funds withheld 1,284,958 1,123,858 12,516,887 14,702,622 – – 13,801,845 15,826,480 Contract deposits 497 – 188,107 92,069 – – 188,604 92,069 Total investments 31,365,692 29,265,004 21,693,566 22,385,833 278,094 495,722 53,337,352 52,146,559 Reinsurance recoverables on unpaid claims 1,070,380 1,052,357 325,515 325,534 (614) (1,459) 1,395,281 1,376,432 Reinsurance recoverables on benefit reserve – – 1,367,173 676,219 – – 1,367,173 676,219 Prepaid reinsurance premium 162,529 147,846 1,517 1,470 (23) (59) 164,023 149,257 Reinsurance recoverables on other reserves 6,860 421 1,827 5,025 – – 8,687 5,446 Deferred acquisition costs 696,406 597,299 1,398,264 1,317,295 1 4 2,094,671 1,914,598 Accounts receivable 2,167,691 1,493,908 1,498,436 1,620,237 (190) (167) 3,665,937 3,113,978 Other assets in the segment 1,334,802 1,416,187 675,435 680,215 (828,423) (1,021,307) 1,181,814 1,075,095 Total assets 36,804,360 33,973,022 26,961,733 27,011,828 (551,155) (527,266) 63,214,938 60,457,584

Segmentation of liabilities

in EUR thousand

Liabilities Loss and loss adjustment expense reserve 22,822,777 20,797,820 3,734,225 3,315,694 (614) (1,458) 26,556,388 24,112,056 Benefit reserve – – 12,206,721 11,757,188 (22) (56) 12,206,699 11,757,132 Unearned premium reserve 3,019,217 2,626,890 140,146 121,704 – – 3,159,363 2,748,594 Provisions for contingent commissions 119,668 158,410 205,860 165,830 – – 325,528 324,240 Funds withheld 425,360 442,211 839,675 374,926 – – 1,265,035 817,137 Contract deposits 4,448 4,285 4,678,036 6,068,053 – – 4,682,484 6,072,338 Reinsurance payable 655,157 358,836 735,027 742,649 (178) (168) 1,390,006 1,101,317 Long-term liabilities 308,484 283,855 – – 1,489,853 1,986,492 1,798,337 2,270,347 Other liabilities in the segment 2,135,696 2,042,408 1,747,491 1,982,821 (829,559) (1,023,766) 3,053,628 3,001,463 Total liabilities 29,490,807 26,714,715 24,287,181 24,528,865 659,480 961,044 54,437,468 52,204,624

172 Hannover Re | Annual Report 2015 Consolidated segment report as at 31 December 2015 N 13

Segmentation of liabilities in EUR thousand Annual financial statements

Hannover Re | Annual Report 2015 173 Consolidated segment report as at 31 December 2015

Segment statement of income Property and casualty reinsurance Life and health reinsurance Consolidation Total in EUR thousand 1.1. – 31.12.2015 1.1. – 31.12.2014 1.1. – 31.12.2015 1.1. – 31.12.2014 1.1. – 31.12.2015 1.1. – 31.12.2014 1.1. – 31.12.2015 1.1. – 31.12.2014 Gross written premium 9,337,973 7,903,369 7,730,885 6,458,669 (195) (237) 17,068,663 14,361,801 thereof From insurance business with other segments – – 195 237 (195) (237) – – From insurance business with external third parties 9,337,973 7,903,369 7,730,690 6,458,432 – – 17,068,663 14,361,801 Net premium earned 8,099,717 7,011,347 6,492,412 5,411,425 913 309 14,593,042 12,423,081 Net investment income 944,962 843,552 709,173 614,201 10,958 14,088 1,665,093 1,471,841 thereof Change in fair value of financial instruments 851 (23,344) 50 (9,083) – (830) 901 (33,257) Total depreciation, impairments and appreciation of investments 35,556 27,429 177 129 2,365 – 38,098 27,558 Income / expense on funds withheld and contract deposits 20,162 20,394 374,871 355,662 – – 395,033 376,056 Claims and claims expenses 5,616,450 4,827,939 5,458,957 4,636,243 – (10) 11,075,407 9,464,172 Change in benefit reserve – – 101,123 28,620 34 5 101,157 28,625 Commission and brokerage, change in deferred acquisition costs and other technical income / expenses 1,849,059 1,643,705 1,075,078 946,361 2 – 2,924,139 2,590,066 Administrative expenses 201,962 188,198 197,254 175,682 (704) (21) 398,512 363,859 Other income and expenses (35,900) (4,265) 35,919 25,097 (3,703) (2,642) (3,684) 18,190 Operating profit / loss (EBIT) 1,341,308 1,190,792 405,092 263,817 8,836 11,781 1,755,236 1,466,390 Interest on hybrid capital – – – – 84,316 95,720 84,316 95,720 Net income before taxes 1,341,308 1,190,792 405,092 263,817 (75,480) (83,939) 1,670,920 1,370,670 Taxes 368,383 296,084 109,713 44,941 (21,889) (35,462) 456,207 305,563 Net income 972,925 894,708 295,379 218,876 (53,591) (48,477) 1,214,713 1,065,107 thereof Non-controlling interest in profit or loss 58,198 65,560 5,790 13,898 – – 63,988 79,458 Group net income 914,727 829,148 289,589 204,978 (53,591) (48,477) 1,150,725 985,649

174 Hannover Re | Annual Report 2015 Consolidated segment report as at 31 December 2015

Hannover Re | Annual Report 2015 175 6. Notes on the individual items of the balance sheet

6.1 Investments under own management

Investments are classified and measured in accordance with The investments under own management also encompass IAS 39 “Financial Instruments: Recognition and Measurement”. investments in associated companies, real estate and real estate funds (also includes: investment property), other invested Hannover Re classifies investments according to the following assets, short-term investments and cash. categories: held-to-maturity, loans and receivables, financial assets at fair value through profit or loss and available-for-sale. The following table shows the regional origin of the invest- The allocation and measurement of investments are determined ments under own management. by the investment intent.

Investments N 14

in EUR thousand 2015 2014 Regional origin Germany 7,039,131 6,592,773 United Kingdom 2,959,291 2,674,766 France 1,605,671 1,769,512 Other 6,763,836 7,649,712 Europe 18,367,929 18,686,763

USA 12,525,280 9,875,092 Other 1,613,473 1,468,426 North America 14,138,753 11,343,518

Asia 2,429,402 1,819,615 Australia 2,352,170 2,556,507 Australasia 4,781,572 4,376,122

Africa 334,691 352,192 Other 1,723,958 1,469,415

Total 39,346,903 36,228,010

176 Hannover Re | Annual Report 2015 Maturities of the fixed-income and variable-yield securities N 15

in EUR thousand 2015 2014 Amortised cost 1 Fair value Amortised cost 1 Fair value Held to maturity due in one year 516,518 523,403 1,089,446 1,110,905 due after one through two years 142,835 147,242 539,118 561,992 due after two through three years 92,480 96,765 145,300 151,217 due after three through four years 28,933 31,692 97,896 103,592 due after four through five years 35,024 40,966 32,696 35,894 due after five through ten years 190,907 219,086 234,795 273,704 due after more than ten years 968 323 491 568 Total 1,007,665 1,059,477 2,139,742 2,237,872

Loans and receivables due in one year 411,608 422,774 261,575 265,156 due after one through two years 280,642 289,989 373,036 390,647 due after two through three years 152,075 159,589 268,376 283,396 due after three through four years 200,139 219,242 143,511 152,077 due after four through five years 220,728 243,500 197,584 219,375 due after five through ten years 898,664 1,035,482 979,791 1,122,393 due after more than ten years 706,009 858,523 764,314 954,282 Total 2,869,865 3,229,099 2,988,187 3,387,326

Available for sale due in one year 2 4,088,058 4,096,488 3,731,723 3,747,673 due after one through two years 3,889,262 3,915,448 2,415,488 2,449,568

due after two through three years 3,803,539 3,827,843 2,908,199 2,972,420 Annual financial statements due after three through four years 2,572,827 2,624,891 2,904,276 2,951,154 due after four through five years 3,829,675 3,915,469 2,655,178 2,741,708 due after five through ten years 9,449,584 9,659,645 9,181,834 9,760,031 due after more than ten years 3,253,590 3,482,398 3,122,626 3,543,151 Total 30,886,535 31,522,182 26,919,324 28,165,705

Financial assets at fair value through profit or loss due in one year 13,703 13,703 5,306 5,306 due after one through two years 19,027 19,027 2,433 2,433 due after two through three years 53,432 53,432 12,251 12,251 due after three through four years 19,841 19,841 20,590 20,590 due after four through five years 2,979 2,979 10,790 10,790 due after five through ten years – – 146 146 due after more than ten years – – 12,978 12,978 Total 108,982 108,982 64,494 64,494

1 Including accrued interest 2 Including short-term investments, cash and cash equivalents

Hannover Re | Annual Report 2015 177 The stated maturities may in individual cases diverge from the Variable-rate bonds (so-called “floaters”) are shown under the contractual maturities because borrowers may have the right maturities due in one year and constitute our interest-related, to call or prepay obligations with or without penalty. within-the-year reinvestment risk.

Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 16 classified as held to maturity as well as their fair value

2015 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Investments held to maturity Fixed-income securities Government debt securities of EU member states 163,206 4,126 2,395 7 165,594 US Treasury notes 82,688 646 139 – 82,827 Other foreign government debt securities 20,074 65 65 – 20,139 Debt securities issued by semi-governmental entities 219,019 4,317 6,503 – 225,522 Corporate securities 92,070 1,521 7,635 81 99,624 Covered bonds / asset-backed securities 430,608 9,255 35,808 645 465,771 Total 1,007,665 19,930 52,545 733 1,059,477

Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 17 classified as held to maturity as well as their fair value

2014 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Investments held to maturity Fixed-income securities Government debt securities of EU member states 391,809 7,071 10,099 – 401,908 US Treasury notes 257,279 1,395 3,067 – 260,346 Other foreign government debt securities 29,196 96 200 – 29,396 Debt securities issued by semi-governmental entities 427,611 6,444 16,019 1,463 442,167 Corporate securities 238,426 3,189 11,051 159 249,318 Covered bonds / asset-backed securities 795,421 15,527 59,316 – 854,737 Total 2,139,742 33,722 99,752 1,622 2,237,872

The carrying amount of the portfolio held to maturity is arrived at from the amortised cost plus accrued interest.

178 Hannover Re | Annual Report 2015 Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value N 18

2015 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Loans and receivables Debt securities issued by semi-governmental entities 1,595,127 26,617 243,934 1 1,839,060 Corporate securities 468,607 5,906 18,604 4,732 482,479 Covered bonds / asset-backed securities 806,131 12,968 101,457 28 907,560 Total 2,869,865 45,491 363,995 4,761 3,229,099

Amortised cost, unrealised gains and losses and accrued interest on loans and receivables as well as their fair value N 19

2014 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Loans and receivables Debt securities issued by semi-governmental entities 1,655,060 27,559 260,622 – 1,915,682 Corporate securities 463,830 5,661 20,578 453 483,955 Covered bonds / asset-backed securities 869,297 13,495 118,402 10 987,689 Total 2,988,187 46,715 399,602 463 3,387,326

The carrying amount of the loans and receivables is arrived at Annual financial statements from the amortised cost plus accrued interest.

Hannover Re | Annual Report 2015 179 Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 20 classified as available for sale as well as their fair value

2015 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Available for sale Fixed-income securities Government debt securities of EU member states 2,394,804 19,460 135,191 3,849 2,526,146 US Treasury notes 5,382,835 12,699 13,566 32,877 5,363,524 Other foreign government debt securities 2,148,576 18,299 25,602 38,766 2,135,412 Debt securities issued by semi-governmental entities 4,436,469 41,568 236,064 11,728 4,660,805 Corporate securities 11,911,422 140,011 320,712 168,280 12,063,854 Covered bonds / asset-backed securities 2,599,092 27,919 147,909 19,549 2,727,452 Investment funds 107,603 – 33,096 1,444 139,255 28,980,801 259,956 912,140 276,493 29,616,448

Equity securities Shares 290,609 – 26,733 4,979 312,363 Investment funds 125,744 – 14,001 – 139,745 416,353 – 40,734 4,979 452,108 Short-term investments 1,113,130 1,585 – – 1,113,130

Total 30,510,284 261,541 952,874 281,472 31,181,686

180 Hannover Re | Annual Report 2015 Amortised cost, unrealised gains and losses and accrued interest on the portfolio of investments N 21 classified as available for sale as well as their fair value

2014 Amortised thereof Unrealised Unrealised Fair value cost including accrued interest gains losses in EUR thousand accrued interest Available for sale Fixed-income securities Government debt securities of EU member states 2,411,949 18,573 169,231 1,733 2,579,447 US Treasury notes 2,684,743 7,145 36,544 4,904 2,716,383 Other foreign government debt securities 1,816,756 16,522 27,294 33,322 1,810,728 Debt securities issued by semi-governmental entities 4,183,118 42,250 305,078 2,954 4,485,242 Corporate securities 11,371,250 140,368 557,169 46,694 11,881,725 Covered bonds / asset-backed securities 3,030,708 33,214 222,538 7,547 3,245,699 Investment funds 72,618 – 25,681 – 98,299 25,571,142 258,072 1,343,535 97,154 26,817,523

Equity securities Shares 12,323 – 7,215 17 19,521 Investment funds 8,011 – 5,272 – 13,283 20,334 – 12,487 17 32,804 Short-term investments 575,300 3,886 – – 575,300

Total 26,166,776 261,958 1,356,022 97,171 27,425,627 Annual financial statements

The carrying amounts of the fixed-income securities and equity securities classified as available for sale as well as the short- term investments allocated to this category correspond to their fair values, in the case of interest-bearing assets including accrued interest.

Fair value of financial assets at fair value through profit or loss before and after accrued interest N 22 as well as accrued interest on such financial assets

2015 2014 2015 2014 2015 2014 Fair value before Accrued interest Fair value in EUR thousand accrued interest Financial assets at fair value through profit or loss Fixed-income securities Corporate securities 108,566 63,795 416 699 108,982 64,494 Covered bonds / asset-backed securities – – – – – – 108,566 63,795 416 699 108,982 64,494

Other financial assets Derivatives 39,602 66,394 – – 39,602 66,394 39,602 66,394 – – 39,602 66,394

Total 148,168 130,189 416 699 148,584 130,888

Hannover Re | Annual Report 2015 181 The carrying amounts of the financial assets at fair value We additionally use an internal rating method to back up this through profit or loss correspond to their fair values including analysis. Our internal rating system is based on the corre- accrued interest. sponding credit ratings of securities assigned by the agencies Standard & Poor’s and Moody’s and in each case reflects the Hannover Re recognised in this category as at the balance lowest of the available ratings. sheet date derivative financial instruments in an amount of EUR 39.6 million (EUR 66.4 million) that are originally alloca- For further information please see the explanatory remarks ble to this item as well as fixed-income securities amounting in Section 8.1 “Derivative financial instruments and financial to EUR 109.0 million (EUR 64.5 million) designated in this guarantees”. category.

Analysis of the fair value changes in the portfolio of fixed-income securities at fair value through profit or loss indicated that no fair value changes (EUR 0.3 million) were due to changes in ratings.

Carrying amounts before impairment N 23

2015 2014 Carrying amount Impairment Carrying amount Impairment in EUR thousand before impairment before impairment Fixed-income securities – held to maturity 1,010,030 2,365 2,139,742 – Fixed-income securities – loans and receivables 2,869,865 – 2,990,187 2,000 Fixed-income securities – available for sale 29,616,845 397 26,817,523 – Short-term investments 1,113,130 – 575,300 – Equity securities – available for sale 453,997 1,889 32,804 – Participating interests and other invested assets, real estate funds 1,922,482 6,694 1,643,408 5,847 Total 36,986,349 11,345 34,198,964 7,847

For further explanatory remarks on the impairment criteria please see Section 3.2 “Summary of major accounting policies”.

182 Hannover Re | Annual Report 2015 Rating structure of fixed-income securities N 24

2015

in EUR thousand AAA AA A BBB BB B C Other Total Fixed-income securities – held-to-maturity 594,316 218,555 136,257 58,537 – – – – 1,007,665 Fixed-income securities – loans and receivables 1,869,317 551,144 184,580 157,506 82,178 4,925 – 20,215 2,869,865 Fixed-income securities – available-for-sale 12,270,732 5,002,570 5,971,866 5,329,934 806,651 114,680 6,258 113,757 29,616,448 Fixed-income securities – at fair value through profit or loss – – – – 54,033 8,982 – 45,967 108,982 Total fixed-income securities 14,734,365 5,772,269 6,292,703 5,545,977 942,862 128,587 6,258 179,939 33,602,960

Rating structure of fixed-income securities N 25

2014

in EUR thousand AAA AA A BBB BB B C Other Total Fixed-income securities – held-to-maturity 1,102,639 492,209 474,167 65,658 – – 5,069 – 2,139,742 Fixed-income securities – loans and receivables 1,808,018 616,470 317,318 135,878 46,117 4,732 – 59,654 2,988,187 Fixed-income securities – available-for-sale 9,688,957 5,080,801 6,951,209 4,105,419 760,200 114,779 12,507 103,651 26,817,523 Annual financial statements Fixed-income securities – at fair value through profit or loss – 67 9,203 226 35,220 7,448 – 12,330 64,494 Total fixed-income securities 12,599,614 6,189,547 7,751,897 4,307,181 841,537 126,959 17,576 175,635 32,009,946

The maximum credit risk of the items shown here corresponds to their carrying amounts.

Hannover Re | Annual Report 2015 183 Breakdown of investments by currencies N 26

2015

in EUR thousand AUD CAD CNY EUR GBP USD ZAR Other Total Fixed-income securities – held to maturity – 58,813 – 628,496 80,673 239,683 – – 1,007,665 Fixed-income securities – loans and receivables – – 87,851 2,107,800 47,801 626,413 – – 2,869,865 Fixed-income securities – available-for-sale 1,923,332 886,984 191,808 7,042,147 3,051,928 15,131,219 181,058 1,207,972 29,616,448 Fixed-income securities – at fair value through profit or loss – – – 5,061 709 103,212 – – 108,982 Equity securities – available-for-sale – – – 333,222 – 118,886 – – 452,108 Other financial assets – at fair value through profit or loss – – – 9,045 1,265 29,292 – – 39,602 Other invested assets – – – 1,670,086 2,592 1,653,348 10,032 10,441 3,346,499 Short-term investments, cash 86,202 22,175 407,697 325,441 62,564 490,382 99,771 411,502 1,905,734 Total 2,009,534 967,972 687,356 12,121,298 3,247,532 18,392,435 290,861 1,629,915 39,346,903

184 Hannover Re | Annual Report 2015 Breakdown of investments by currencies N 27

2014

in EUR thousand AUD CAD CNY EUR GBP USD ZAR Other Total Fixed-income securities – held to maturity – 101,700 – 1,273,877 154,598 609,567 – – 2,139,742 Fixed-income securities – loans and receivables – 6,490 95,818 2,112,064 45,092 724,533 – 4,190 2,988,187 Fixed-income securities – available-for-sale 1,769,408 753,826 102,042 8,246,517 2,794,734 11,808,473 204,544 1,137,979 26,817,523 Fixed-income securities – at fair value through profit or loss – – – 18,014 649 45,831 – – 64,494 Equity securities – available-for-sale – – – 19,409 – 13,395 – – 32,804 Other financial assets – at fair value through profit or loss – – – 19,083 967 46,344 – – 66,394 Other invested assets – – – 1,427,513 1,790 1,337,537 3,839 5 2,770,684 Short-term investments, cash 117,146 46,533 86,212 235,930 73,385 405,008 119,709 264,259 1,348,182 Total 1,886,554 908,549 284,072 13,352,407 3,071,215 14,990,688 328,092 1,406,433 36,228,010

The maximum credit risk of the items shown here corresponds to their carrying amounts.

Associated companies The associated companies included at equity in the consoli- Information on the percentage share held by the Hannover Annual financial statements dated financial statement that both on an individual basis and Re Group in the capital of the associated companies as well in their entirety are not material for the Hannover Re Group as on the amount of capital and reserves and the result for the pursuant to IFRS 12 are comprised of last financial year of these companies is provided in the list of shareholdings in Section 4.2 “Consolidated companies and • Oval Office Grundstücks GmbH, Hannover, Germany, complete list of shareholdings”. • WeHaCo Unternehmensbeteiligungs-GmbH, Hannover, Germany, The following table shows combined financial information on • HANNOVER Finanz GmbH, Hannover, Germany, the Hannover Re Group’s individual non-material investments • Glencar Underwriting Managers, Inc., Chicago, in associated companies. United States, • ITAS Vita S.p.A., Trento, Italy, as well as the following companies included at equity within the subgroup Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, South Africa:

• Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg, South Africa, • Clarenfin (Pty) Ltd., Johannesburg, South Africa, • Camargue Underwriting Managers (Pty) Ltd., Johannesburg, South Africa, • Synergy XOL (Pty) Ltd., Johannesburg, South Africa, • Vela Taxi Finance (Pty) Ltd., Johannesburg, South Africa.

Hannover Re | Annual Report 2015 185 Financial information on investments in associated companies N 28

in EUR thousand 2015 2014 Group share of net income from continuing operations 19,169 1,042 Group share of income and expense recognised directly in equity 2,407 10,217 Group share of total recognised income and expense 21,576 11,259

The carrying amount of the investments in associated companies changed as follows in the year under review:

Investments in associated companies N 29

in EUR thousand 2015 2014 Net book value at 31 December of the previous year 154,822 144,489 Currency translation at 1 January 113 58 Net book value after currency translation 154,935 144,547 Additions – 5,297 Disposals 33,952 264 Profit or loss on investments in associated companies 19,169 1,042 Dividend payments 14,713 6,667 Change recognised outside income 2,407 10,217 Currency translation at 31 December 162 650 Net book value at 31 December of the year under review 128,008 154,822

No discontinued operations existed in the year under review Public price listings are not available for companies valued at among the companies measured at equity. Insofar as there are equity. The net book value of associated companies includes commitments from contingent liabilities of associated compa- goodwill in the amount of EUR 21.9 million (EUR 23.1 million). nies, the Hannover Re Group shares in such commitments in For further details please see Section 4 “Consolidation”. proportion to its respective shareholding.

Real estate Real estate is divided into real estate for own use and third- Real estate is valued at cost of acquisition less scheduled depre- party use (investment property). Own-use real estate is recog- ciation with useful lives of at most 50 years. nised under other assets.

The investment property in the portfolio which is used to generate income is shown under the investments. Income and expenses from rental agreements are included in the investment income.

186 Hannover Re | Annual Report 2015 Development of investment property N 30

in EUR thousand 2015 2014 Gross book value at 31 December of the previous year 1,023,281 872,905 Currency translation at 1 January 39,440 46,322 Gross book value after currency translation 1,062,721 919,227 Additions 314,661 144,407 Disposals 6,935 41,388 Reclassification 26 4,766 Currency translation at 31 December 3,832 (3,731) Gross book value at 31 December of the year under review 1,374,305 1,023,281

Cumulative depreciation at 31 December of the previous year 44,979 25,741 Currency translation at 1 January 2,402 2,035 Cumulative depreciation after currency translation 47,381 27,776 Disposals 2,748 4,835 Depreciation 23,750 18,513 Impairments 3,619 1,323 Appreciation 616 126 Reclassification 26 1,997 Currency translation at 31 December 190 331 Cumulative depreciation at 31 December of the year under review 71,602 44,979

Net book value at 31 December of the previous year 978,302 847,164 Net book value at 1 January of the year under review 1,015,340 891,451 Net book value at 31 December of the year under review 1,302,703 978,302 Annual financial statements The fair value of investment property amounted to management costs. The valuation result is also influenced by EUR 1,388.7 million (EUR 1,038.6 million) as at the balance increases and reductions based on specific property circum- sheet date. stances (upkeep, vacancies, rent divergences from the market level, etc.). The evaluation of international real estate also The additions to this item are attributable to the increased draws primarily on the discounted cash flow method. The main investment activities of the real estate companies belonging feature of this method is the present value estimation of pro- to the Hannover Re Group, principally due to investments in jected annual free cash flows. Europe and the United States. Real estate which is held for sale as defined by IFRS 5 is rec- In terms of diversification across various real estate sectors the ognised separately in the consolidated balance sheet. Inten- focus is on office properties (70%), followed by retail prop- tions to sell are substantiated by individual real estate market erties (17%). The allocation is complemented by investments conditions and specific property circumstances, taking into in further sectors, including for example parking facilities consideration current and future opportunity / risk profiles. In (7%) and logistics (2%). In geographical terms, exposures the year under review no properties were reclassified to assets are spread across the United States (43%), Europe (excluding held for sale. Germany; 33%) as well as Germany (24%). In addition, we held indirect real estate investments measured The real estate in the investment portfolio is normally subject at fair values in an amount of EUR 371.3 million (EUR 321.0 mil- to internal and external valuation by an appraiser as at the lion) in the year under review, the amortised costs of which balance sheet date. The two analyses do not differ from one amounted to EUR 316.0 million (EUR 260.1 million). The another in the methodology used, which means that the find- differences between the carrying amounts and amortised ings are comparable at all times and on a continuous basis. costs were recognised as unrealised gains of EUR 56.4 mil- Generally speaking, the fair value of the real estate is deter- lion (EUR 62.1 million) and unrealised losses of EUR 1.2 mil- mined using the discounted cash flow (DCF) method, with lion (EUR 1.2 million) under cumulative other comprehensive rental income capitalised in consideration of the associated income.

Hannover Re | Annual Report 2015 187 Other invested assets The other invested assets consisted largely of participating of EUR 6.7 million (EUR 4.8 million) under cumulative other interests in partnerships measured at fair value in an amount comprehensive income. of EUR 1,396.0 million (EUR 1,153.9 million), the amortised cost of which amounted to EUR 976.5 million (EUR 749.7 mil- In addition, acquired life insurance policies measured at lion). The differences between the carrying amounts and fair value through profit or loss were recognised under the the amortised costs were recognised as unrealised gains of other invested assets in an amount of EUR 79.4 million EUR 426.2 million (EUR 409.0 million) and unrealised losses (EUR 105.0 million).

Short-term investments This item comprises investments with a maturity of up to one year at the time of investment.

Fair value hierarchy For the purposes of the disclosure requirements pursuant to If input factors from different levels are used to measure a IFRS 13 “Fair Value Measurement”, financial assets and lia- financial instrument, the level of the lowest input factor mate- bilities are to be assigned to a three-level fair value hierarchy. rial to measurement is determinative.

The fair value hierarchy, which reflects characteristics of the The operational units responsible for coordinating and docu- price data and inputs used for measurement purposes, is struc- menting measurement are organisationally separate from the tured as follows: operational units that enter into investment risks. All relevant valuation processes and valuation methods are documented. • Level 1: Assets or liabilities measured at (unadjusted) Decisions on fundamental valuation issues are taken by a val- prices quoted directly in active and liquid markets uation committee that meets monthly. • Level 2: Assets or liabilities which are measured using observable market data and are not allocable to level 1. In the previous year alternative investments with a fair value of Measurement is based, in particular, on prices for EUR 36.3 million were no longer allocable to level 2 but rather comparable assets and liabilities that are traded on to 3 as a consequence of model-based pricing. active markets, prices on markets that are not considered active as well as inputs derived from such prices The following table shows the breakdown of financial assets or market data and liabilities recognised at fair value into the three-level fair • Level 3: Assets or liabilities that cannot be measured value hierarchy. or can only be partially measured using observable market inputs. The measurement of such instruments draws principally on valuation models and methods.

188 Hannover Re | Annual Report 2015 Fair value hierarchy of financial assets and liabilities recognised at fair value N 31

2015

in EUR thousand Level 1 Level 2 Level 3 Total Fixed-income securities 34,077 29,691,353 – 29,725,430 Equity securities 452,098 – 10 452,108 Other financial assets – 39,602 – 39,602 Real estate and real estate funds – – 371,254 371,254 Other invested assets – – 1,475,415 1,475,415 Short-term investments 1,113,130 – – 1,113,130 Other assets – 1,999 – 1,999 Total financial assets 1,599,305 29,732,954 1,846,679 33,178,938 Other liabilities – 13,860 156,144 170,004 Total financial liabilities – 13,860 156,144 170,004

Fair value hierarchy of financial assets and liabilities recognised at fair value N 32

2014

in EUR thousand Level 1 Level 2 Level 3 Total Fixed-income securities 28,752 26,852,743 522 26,882,017 Equity securities 32,796 – 8 32,804 Other financial assets – 66,394 – 66,394 Real estate and real estate funds – – 320,956 320,956 Other invested assets – – 1,258,903 1,258,903 Short-term investments 575,300 – – 575,300 Other assets – 1,066 – 1,066 Total financial assets 636,848 26,920,203 1,580,389 29,137,440 Other liabilities – 103,760 136,486 240,246 Annual financial statements Total financial liabilities – 103,760 136,486 240,246

Hannover Re | Annual Report 2015 189 The following table provides a reconciliation of the fair values of financial assets and liabilities included in level 3 at the beginning of the financial year with the fair values as at 31 December of the financial year.

Movements in level 3 financial assets and liabilities N 33

2015 Fixed-income Equities, equity Real estate Other invested Other liabilities securities funds and other and real estate assets variable-yield funds in EUR thousand securities Net book value at 31 December of the previous year 522 8 320,956 1,258,903 136,486 Currency translation at 1 January 59 2 17,605 88,473 15,339 Net book value after currency translation 581 10 338,561 1,347,376 151,825 Income and expenses recognised in the statement of income – – (921) (13,829) (17,771) recognised directly in shareholders’ equity – – (9,679) (41,991) – Purchases – – 143,631 368,895 53,050 Sales – – 99,962 182,540 31,038 Settlements 567 – – – – Transfers to level 3 – – – – – Transfers from level 3 – – – – – Currency translation at 31 December of the year under review (14) – (376) (2,496) 78 Net book value at 31 December of the year under review – 10 371,254 1,475,415 156,144

Movements in level 3 financial assets and liabilities N 34

2014 Fixed-income Equities, equity Real estate Other invested Other liabilities securities funds and other and real estate assets variable-yield funds in EUR thousand securities Net book value at 31 December of the previous year 5,179 8 247,400 952,451 68,827 Currency translation at 1 January 649 – 14,229 82,228 – Net book value after currency translation 5,828 8 261,629 1,034,679 68,827 Income and expenses recognised in the statement of income 1 – (11) (8,773) (3,604) recognised directly in shareholders’ equity – – 14,031 72,694 – Purchases – – 86,018 258,548 57,281 Sales 597 – 43,512 139,710 – Settlements 4,118 – – – – Transfers to level 3 – – – 36,292 – Transfers from level 3 – – – – – Currency translation at 31 December of the year under review (592) – 2,801 5,173 13,982 Net book value at 31 December of the year under review 522 8 320,956 1,258,903 136,486

190 Hannover Re | Annual Report 2015 The breakdown of income and expenses recognised in the statement of income in the financial year in connection with financial assets and liabilities assigned to level 3 is as follows.

Income and expenses from level 3 financial assets and liabilities N 35

2015 Fixed-income Real estate and Other invested Other liabilities in EUR thousand securities real estate funds assets Total in the financial year Realised gains and losses on investments – (79) (16,108) – Change in fair value of financial instruments – – 8,131 17,771 Total depreciation, impairments and appreciation of investments – (842) (5,852) – Thereof attributable to financial instruments included in the portfolio at 31 December of the year under review Change in fair value of financial instruments – – 8,131 17,771 Total depreciation, impairments and appreciation of investments – (842) (5,851) –

Income and expenses from level 3 financial assets and liabilities N 36

2014 Fixed-income Real estate and Other invested Other liabilities in EUR thousand securities real estate funds assets Total in the financial year Realised gains and losses on investments – – – – Change in fair value of financial instruments 1 – (3,014) 3,604 Total depreciation, impairments and appreciation of investments – (11) (5,759) – Annual financial statements Thereof attributable to financial instruments included in the portfolio at 31 December of the year under review Change in fair value of financial instruments 1 – (3,014) 3,604 Total depreciation, impairments and appreciation of investments – (11) (5,759) –

If models are used to measure financial assets and liabilities in level 3 with a volume of EUR 79.4 million (EUR 105.6 mil- included in level 3 under which the adoption of alternative lion) relate to acquired life insurance policies, the valuation of inputs leads to a material change in fair value, IFRS 13 requires which is based on technical parameters. Derivative financial disclosure of the effects of these alternative assumptions. Of instruments in connection with the reinsurance business were the financial assets included in level 3 with fair values of alto- recognised under the other liabilities included in level 3 in the gether EUR 1,846.7 million (EUR 1,580.4 million) as at the year under review. Their performance is dependent upon the balance sheet date, Hannover Re measures financial assets risk experience of an underlying group of primary insurance with a volume of EUR 1,767.3 million (EUR 1,474.8 million) contracts with statutory reserving requirements. The appli- using the net asset value method, in respect of which alterna- cation of alternative inputs and assumptions has no material tive inputs within the meaning of the standard cannot reason- effect on the consolidated financial statement. ably be established. The remaining financial assets included

Hannover Re | Annual Report 2015 191 Fair value hierarchy of financial assets and liabilities measured at amortised cost N 37

2015

in EUR thousand Level 1 Level 2 Level 3 Total Fixed-income securities – 4,276,334 12,242 4,288,576 Real estate and real estate funds – – 1,388,656 1,388,656 Other invested assets – 11,224 57,894 69,118 Total financial assets – 4,287,558 1,458,792 5,746,350 Long-term debt and subordinated capital – 1,969,384 – 1,969,384 Total financial liabilities – 1,969,384 – 1,969,384

Fair value hierarchy of financial assets and liabilities measured at amortised cost N 38

2014

in EUR thousand Level 1 Level 2 Level 3 Total Fixed-income securities – 5,625,198 – 5,625,198 Real estate and real estate funds – – 1,038,579 1,038,579 Other invested assets – 2,657 55,045 57,702 Total financial assets – 5,627,855 1,093,624 6,721,479 Long-term debt and subordinated capital – 2,469,795 – 2,469,795 Total financial liabilities – 2,469,795 – 2,469,795

6.2 Funds withheld (assets)

The funds withheld totalling EUR 13,801.8 million the corresponding provisions. In the event of default on such (EUR 15,826.5 million) represent the cash and securities depos- a deposit our reinsurance commitment is reduced to the same its furnished by our company to our cedants that do not trig- extent. The decrease in funds withheld was attributable prin- ger any cash flows and cannot be realised by cedants without cipally to partial withdrawals for specific underwriting years our consent. The maturities of these deposits are matched to in relation to our UK single premium business.

6.3 Contract deposits (assets)

The contract deposits on the assets side increased by EUR 96.5 million in the year under review from EUR 92.1 million to EUR 188.6 million.

6.4 Technical assets

The retrocessionaires’ portions of the technical provisions are on the basis of the estimated gross profit margins from the based on the contractual agreements of the underlying rein- reinsurance treaties, making allowance for the period of the surance treaties. For further details please refer to our com- insurance contracts. A discount rate based on the interest for ments on the technical provisions in Section 6.7 “Technical medium-term government bonds was applied to such contracts. provisions” on page 198 et seq. as well as the remarks in the In the case of annuity policies with a single premium payment, risk report on page 91 et seq. these values refer to the expected policy period or period of annuity payment. SFAS 60 requires that acquisition costs be capitalised as assets and amortised in proportion to the earned premium. In life and health reinsurance the deferred acquisition costs associated with life and annuity policies with regular premium In the case of reinsurance treaties for unit-linked life insurance payments are determined in light of the period of the contracts, policies classified as “universal life-type contracts” pursuant the expected surrenders, the lapse expectancies and the antic- to SFAS 97, the capitalised acquisition costs are amortised ipated interest income.

192 Hannover Re | Annual Report 2015 In property and casualty reinsurance acquisition costs directly connected with the acquisition or renewal of contracts are deferred for the unearned portion of the premium.

Development of deferred acquisition costs N 39

in EUR thousand 2015 2014 Net book value at 31 December of the previous year 1,914,598 1,672,398 Currency translation at 1 January 71,870 113,388 Net book value after currency translation 1,986,468 1,785,786 Additions 600,389 489,910 Amortisations 498,666 368,029 Currency translation at 31 December 6,480 6,931 Net book value at 31 December of the year under review 2,094,671 1,914,598

For further explanatory remarks please see Section 3.2 “Sum- The age structure of the accounts receivable which were unad- mary of major accounting policies”. justed but considered overdue as at the balance sheet date is presented below.

Age structure of overdue accounts receivable N 40

2015 2014 Three months More than Three months More than in EUR thousand to one year one year to one year one year Accounts receivable 236,444 140,600 218,824 142,102

Within the scope of our management of receivables we expect The default risks associated with accounts receivable under to receive payment of accounts receivable within three months reinsurance business are determined and recognised on the of the date of creation of the debit entry – a period for which we basis of case-by-case analysis. Annual financial statements also make allowance in our risk analysis. Please see our comments on the credit risk within the risk report on page 87 et seq. The value adjustments on accounts receivable that we recognise in adjustment accounts changed as follows in the year under review:

Value adjustments on accounts receivable N 41

in EUR thousand 2015 2014 Cumulative value adjustments at 31 December of the previous year 42,221 35,990 Currency translation at 1 January (4,047) 667 Cumulative value adjustments after currency translation 38,174 36,657 Value adjustments 23,565 21,635 Reversal 10,892 4,107 Utilisation 14,855 11,964 Cumulative value adjustments at 31 December of the year under review 35,992 42,221 Gross book value of accounts receivable at 31 December of the year under review 3,701,929 3,156,199 Cumulative value adjustments at 31 December of the year under review 35,992 42,221 Net book value of accounts receivable at 31 December of the year under review 3,665,937 3,113,978

In addition, we took specific value adjustments on reinsurance provisions”. With regard to the credit risks resulting from tech- recoverables on unpaid claims in the year under review. We nical assets we would also refer the reader to our comments would refer the reader to the corresponding remarks on the loss on page 90 et seq. of the risk report. and loss adjustment expense reserve in Section 6.7 “Technical

Hannover Re | Annual Report 2015 193 6.5 Goodwill

In accordance with IFRS 3 “Business Combinations” scheduled amortisation is not taken on goodwill. Goodwill was subject to an impairment test.

Development of goodwill N 42

in EUR thousand 2015 2014 Net book value at 31 December of the previous year 58,220 57,070 Currency translation at 1 January 1 1,150 Net book value after currency translation 58,221 58,220 Additions 2,365 – Currency translation at 31 December (342) – Net book value at 31 December of the year under review 60,244 58,220

This item principally includes the goodwill from the acquisition the Institute of Public Auditors in Germany (IDW). The beta of E+S Rückversicherung AG as well as from the acquisition of factor is calculated for Hannover Rück SE on the basis of pub- a 75% interest in Integra Insurance Solutions Limited. Good- licly accessible capital market data. The foreign exchange rates will equivalent to altogether EUR 2.4 million was recognised used for currency translation correspond to the situation on in the context of two smaller business combinations within our the balance sheet date. South African subgroup. The following capitalisation rates and growth rates were rec- For the purposes of the impairment test, the goodwill was ognised for the individual cash-generating units: allocated to the cash-generating units (CGUs) that represent the lowest level on which goodwill is monitored for internal Capitalisation rates N 43 management purposes. In the instances of goodwill recognised as at the balance sheet date, the CGUs are the respec- Capitalisation Growth rate rate tive business units / legal entities. The recoverable amount is E+S Rückversicherung AG established on the basis of the value in use, which is calculated 6.900% 1.00% using the discounted cash flow method. In this context, the Integra Insurance Solutions Limited 7.870% 1.00% detailed planning phase draws on the planning calculations of the CGUs / companies covering the next five years. These planning calculations represent the outcome of a detailed planning Sensitivity analyses were performed in which the capitalisa- process in which all responsible members of management are tion rates as well as material and value-influencing items of involved and where allowance is made for the latest market the relevant planning calculations (such as premium volumes, developments affecting the relevant entity (in relation to the investment income or loss ratios) were varied. In this con- sector and the economy as a whole). The subsequent perpetu- text individual parameters were each varied within appropri- ity phase is guided by the profit margins and revenue growth ate ranges that could be anticipated in view of the prevailing rates that management believes can be sustainably generated. market circumstances and developments. It was established The capitalisation rate is based on the Capital Asset Pricing that in the event of changes in parameters within ranges that Model (CAPM) as well as growth rates that are considered real- could reasonably occur, the values in use were in each case istic in light of the specific market environment. The risk-free higher than the corresponding book values. Please see also basic interest rate is determined, where possible, using corre- our basic remarks in Section 3.2 “Summary of major account- sponding yield curve data from the respective national banks. ing policies”. If this data cannot be obtained or can only be obtained with a disproportionately high effort, reference is made to the yields of the respective 30-year government bonds. Both the yield curves and the government bonds reflect the current interest rate trend on financial markets. The selection of the market risk premium is guided by the current recommendations of

194 Hannover Re | Annual Report 2015 6.6 Other assets

Other assets N 44

in EUR thousand 2015 2014 Present value of future profits on acquired life reinsurance portfolios 78,261 82,390 Other intangible assets 47,777 37,462 Insurance for pension commitments 82,152 76,601 Own-use real estate 66,736 67,699 Tax refund claims 96,986 64,785 Fixtures, fittings and equipment 28,707 33,167 Other receivables 8,533 29,771 Other 271,391 226,405 Total 680,543 618,280

Of this, other assets of EUR 4.6 million (EUR 5.1 million) are reinsurance business group. For further explanation please attributable to affiliated companies. see Section 8.1 “Derivative financial instruments and financial guarantees”. The item “Other” includes receivables of EUR 194.7 million (EUR 165.6 million) which correspond to the present value of As in the previous year, the other receivables do not include future premium payments in connection with derivative finan- any items that were overdue but unadjusted as at the balance cial instruments arising from transactions in the life and health sheet date.

Present value of future profits (PVFP) on acquired life reinsurance portfolios

Development of the present value of future profits (PVFP) on acquired life reinsurance portfolios N 45

in EUR thousand 2015 2014

Gross book value at 31 December of the previous year 131,102 130,186 Annual financial statements Currency translation at 1 January 598 916 Gross book value at 31 December of the year under review 131,700 131,102 Cumulative depreciation at 31 December of the previous year 48,712 44,916 Currency translation at 1 January 598 916 Cumulative depreciation after currency translation 49,310 45,832 Amortisation 5,186 3,037 Currency translation at 31 December (1,057) (157) Cumulative depreciation at 31 December of the year under review 53,439 48,712 Net book value at 31 December of the previous year 82,390 85,270 Net book value at 31 December of the year under review 78,261 82,390

This item consists of the present value of future cash flows recognised on business acquired in 2009 in the context of the acquisition of the ING life reinsurance portfolio. This intangible asset is amortised over the term of the underlying reinsurance contracts in proportion to the future premium income. The period of amortisation amounts to altogether 30 years. For further information please refer to our explanatory notes on intangible assets in Section 3.2 “Summary of major accounting policies”.

Hannover Re | Annual Report 2015 195 Insurance for pension commitments Effective 1 July 2003 Hannover Rück SE took out insur- Benefits” they were carried as a separate asset at fair value ance for pension commitments. The commitments involve as at the balance sheet date in an amount of EUR 82.2 million deferred annuities with regular premium payment under a (EUR 76.6 million). group insurance policy. In accordance with IAS 19 “Employee

Fixtures, fittings and equipment

Fixtures, fittings and equipment N 46

in EUR thousand 2015 2014 Gross book value at 31 December of the previous year 143,788 129,828 Currency translation at 1 January 3,078 3,773 Gross book value after currency translation 146,866 133,601 Additions 7,352 13,863 Disposals 7,848 4,245 Reclassifications 993 – Changes in consolidated group 196 (131) Currency translation at 31 December (100) 700 Gross book value at 31 December of the year under review 147,459 143,788 Cumulative depreciation at 31 December of the previous year 110,621 99,608 Currency translation at 1 January 2,740 2,943 Cumulative depreciation after currency translation 113,361 102,551 Disposals 7,349 3,852 Depreciation 12,225 11,436 Reclassifications 419 – Changes in consolidated group 144 (35) Currency translation at 31 December (48) 521 Cumulative depreciation at 31 December of the year under review 118,752 110,621 Net book value at 31 December of the previous year 33,167 30,220 Net book value at 31 December of the year under review 28,707 33,167

With regard to the measurement of fixtures, fittings and equipment, the reader is referred to our explanatory notes on the other assets in Section 3.2 “Summary of major accounting policies”.

196 Hannover Re | Annual Report 2015 Other intangible assets

Development of other intangible assets N 47

in EUR thousand 2015 2014 Gross book value at 31 December of the previous year 220,296 196,689 Currency translation at 1 January 221 1,243 Gross book value after currency translation 220,517 197,932 Changes in the consolidated group 6,131 – Additions 22,773 22,847 Disposals 632 569 Currency translation at 31 December (1,016) 86 Gross book value at 31 December of the year under review 247,773 220,296 Cumulative depreciation at 31 December of the previous year 182,834 165,846 Currency translation at 1 January 103 879 Cumulative depreciation after currency translation 182,937 166,725 Changes in the consolidated group 50 – Disposals 174 468 Appreciation 17 15 Depreciation 17,466 16,525 Currency translation at 31 December (266) 67 Cumulative depreciation at 31 December of the year under review 199,996 182,834 Net book value at 31 December of the previous year 37,462 30,843 Net book value at 31 December of the year under review 47,777 37,462

The item includes EUR 1.6 million (EUR 2.2 million) for The gross book values include rights from long-term reinsur- self-created software and EUR 31.2 million (EUR 30.0 mil- ance treaties still existing as at the balance sheet date. The Annual financial statements lion) for purchased software as at the balance sheet date. intangible assets resulting from these rights were recognised Scheduled depreciation is taken over useful lives of three to ten in the context of business acquisitions in the years 1997 and years. The additions can be broken down into EUR 13.4 million 2002 and were written off in full as at the balance sheet date. (EUR 18.0 million) for purchased software and EUR 1.1 million (EUR 1.0 million) for capitalised development costs for Credit risks may result from other financial assets that were self-created software. not overdue or adjusted as at the balance sheet date. In this regard, the reader is referred in general to our comments on In the context of two smaller business combinations within the credit risk contained in the risk report on page 87 et seq. our South African subgroup customer relationships were identified and recognised at fair value in an amount equivalent to EUR 6.1 million. Amortisation is taken over five years.

Hannover Re | Annual Report 2015 197 6.7 Technical provisions

In order to show the net technical provisions remaining in the retention the following table compares the gross provisions with the corresponding retrocessionaires’ shares, which are shown as assets in the balance sheet.

Technical provisions N 48

2015 2014

in EUR thousand gross retro net gross retro net Loss and loss adjustment expense reserve 26,556,388 1,395,281 25,161,107 24,112,056 1,376,432 22,735,624 Benefit reserve 12,206,699 1,367,173 10,839,526 11,757,132 676,219 11,080,913 Unearned premium reserve 3,159,363 164,023 2,995,340 2,748,594 149,257 2,599,337 Other technical provisions 325,528 8,687 316,841 324,240 5,446 318,794 Total 42,247,978 2,935,164 39,312,814 38,942,022 2,207,354 36,734,668

The loss and loss adjustment expense reserves are in principle calculated on the basis of the information supplied by ceding companies. Additional IBNR reserves are established for losses that have been incurred but not as yet reported. The development of the loss and loss adjustment expense reserve is shown in the following table. Commencing with the gross reserve, the change in the reserve after deduction of the reinsurers’ portions is shown in the year under review and the previous year.

198 Hannover Re | Annual Report 2015 Loss and loss adjustment expense reserve N 49

2015 2014

in EUR thousand gross retro net gross retro net Net book value at 31 December of the previous year 24,112,056 1,376,432 22,735,624 21,666,932 1,403,804 20,263,128 Currency translation at 1 January 1,118,172 55,998 1,062,174 1,361,796 92,399 1,269,397 Net book value after currency translation 25,230,228 1,432,430 23,797,798 23,028,728 1,496,203 21,532,525 Incurred claims and claims expenses (net) 1 Year under review 8,906,387 865,140 8,041,247 7,517,863 796,409 6,721,454 Previous years 3,211,467 177,307 3,034,160 2,983,219 240,501 2,742,718 12,117,854 1,042,447 11,075,407 10,501,082 1,036,910 9,464,172 Less: Claims and claims expenses paid (net) Year under review (2,896,318) (444,929) (2,451,389) (2,692,876) (471,824) (2,221,052) Previous years (8,013,708) (619,536) (7,394,172) (6,830,593) (691,203) (6,139,390) (10,910,026) (1,064,465) (9,845,561) (9,523,469) (1,163,027) (8,360,442) Specific value adjustment for retrocessions – 3 (3) – 40 (40) Reversal of impairments – 29 (29) – 341 (341) Portfolio entries / exits – 176 (176) 2,578 – 2,578 Currency translation at 31 December 118,332 (15,333) 133,665 103,137 6,045 97,092 Net book value at 31 December of the year under review 26,556,388 1,395,281 25,161,107 24,112,056 1,376,432 22,735,624

1 Including expenses recognised directly in shareholders’ equity Annual financial statements In the year under review, as in the previous year, minimal The total amount of the net reserve before specific value specific value adjustments were established and reversed on adjustments, to which the following remarks apply, was retrocessions, i. e. on the reinsurance recoverables on unpaid EUR 25,161.0 million (EUR 22,735.5 million) as at the bal- claims. On balance, therefore, cumulative specific value adjust- ance sheet date. ments of EUR 0.1 million (EUR 0.2 million) were recognised in these reinsurance recoverables as at the balance sheet date.

Run-off of the net loss reserve in the property and casualty reinsurance segment To some extent the loss and loss adjustment expense reserves actual ultimate loss in the original currency, it is ensured that are inevitably based upon estimations that entail an element also after translation to the Group reporting currency (EUR) a of uncertainty. The difference between the loss reserves con- run-off result induced purely by currency effects is not shown. stituted in the previous year and the losses paid out of these reserves is reflected in the net run-off result. In this regard, The run-off triangles show the run-off of the net loss reserve owing to the fact that the period of some reinsurance treaties (loss and loss adjustment expense reserve) established as at is not the calendar year or because they are concluded on an each balance sheet date, this reserve comprising the provi- underwriting-year basis, it is frequently impossible to make an sions constituted in each case for the current and preceding exact allocation of claims expenditures to the current financial occurrence years. year or the previous year. The following table shows the net loss reserve for the property The run-off triangles provided by the reporting units are and casualty reinsurance business group in the years 2005 to shown after adjustment for the currency effects arising out 2015 as well as the run-off of the reserve (so-called run-off tri- of translation of the respective transaction currency into the angle). The figures reported for the 2005 balance sheet year local reporting currency. The run-off triangles of the reporting also include the amounts for previous years that are no longer units delivered in foreign currencies are translated to euro at shown separately in the run-off triangle. The run-off results the current rate on the balance sheet date in order to show shown reflect the changes in the ultimate loss arising in the run-off results after adjustment for currency effects. In cases 2015 financial year for the individual run-off years. where the originally estimated ultimate loss corresponds to the

Hannover Re | Annual Report 2015 199 Net loss reserve and its run-off in the property and casualty reinsurance segment N 50

31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. in EUR million 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Loss and loss adjustment expense reserve (from balance sheet) 13,445.2 13,545.2 12,908.0 13,773.4 14,081.2 15,365.7 16,705.9 17,324.1 17,943.4 19,762.9 21,753.0 Cumulative payments for the year in question and previous years

One year later 3,073.9 2,614.0 2,539.1 3,005.1 2,795.7 2,492.9 3,182.2 2,967.7 3,227.3 3,549.4

Two years later 5,138.9 4,393.9 4,372.6 4,668.8 4,041.2 4,162.8 4,954.2 4,608.8 5,045.4

Three years later 6,319.1 5,753.7 5,510.3 5,437.5 4,874.3 5,173.5 5,899.6 5,818.2

Four years later 7,469.8 6,573.4 6,064.8 6,032.7 5,530.5 5,830.8 6,845.7

Five years later 8,110.6 6,972.9 6,504.3 6,519.4 6,039.7 6,599.1

Six years later 8,430.0 7,316.1 6,870.6 6,851.4 6,545.6

Seven years later 8,700.9 7,591.5 7,149.4 7,199.2

Eight years later 8,931.2 7,819.6 7,441.3

Nine years later 9,116.3 8,055.7

Ten years later 9,319.3 Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve End of year 13,445.2 13,545.2 12,908.0 13,773.4 14,081.2 15,365.7 16,705.9 17,324.1 17,943.4 19,762.9 21,753.0 One year later 14,050.4 12,802.0 13,203.4 14,873.3 13,557.2 14,677.1 16,402.8 16,904.5 17,672.7 19,250.9

Two years later 12,995.2 12,384.6 13,135.0 13,596.7 12,769.7 14,067.2 16,056.5 16,482.5 17,028.6

Three years later 12,462.7 12,305.9 12,645.6 12,694.8 12,178.1 13,650.3 15,560.2 15,965.7

Four years later 12,473.4 11,877.0 11,749.8 12,190.1 11,757.3 13,165.9 14,939.7

Five years later 12,102.4 11,056.1 11,396.0 11,852.7 11,281.1 12,599.5

Six years later 11,346.0 10,782.8 11,091.7 11,345.5 10,751.3

Seven years later 11,146.7 10,506.0 10,681.0 10,856.6

Eight years later 10,933.0 10,187.2 10,262.5

Nine years later 10,706.9 9,772.4

Ten years later 10,326.5 Change relative to previous year Net run-off result 380.4 34.4 3.7 70.3 41.0 36.5 54.1 (103.7) 127.3 (132.1) As percentage of original loss reserve 2.8 0.3 0.0 0.5 0.3 0.2 0.3 (0.6) 0.7 (0.7)

The run-off profit of altogether EUR 512.0 million in the 2015 financial year derives, as in the previous year, above all from positive run-offs of reserves in the areas of marine / aviation, motor third party liability and short-tail property business. An opposing effect was recorded in the area of liability, accident and health insurance.

200 Hannover Re | Annual Report 2015 Maturities of the technical reserves IFRS 4 “Insurance Contracts” requires information which helps up as collateral for these reserves, since the cash inflows and to clarify the amount and timing of cash flows expected from outflows from these deposits are to be allocated directly to the reinsurance contracts. In the following tables we have shown ceding companies. For further explanation of the recognition the future maturities of the technical provisions broken down and measurement of the reserves please see Section 3.2 “Sum- by the expected remaining times to maturity. As part of our mary of major accounting policies”. maturity analysis we have directly deducted the deposits put

Maturities of the technical reserves N 51

2015 Loss and loss adjustment expense reserves Benefit reserve

in EUR thousand gross retro net gross retro net Due in one year 7,307,701 391,609 6,916,092 889,225 448,136 441,089 Due after one through five years 10,514,893 561,676 9,953,217 2,074,902 790,242 1,284,660 Due after five through ten years 3,869,011 187,607 3,681,404 1,074,674 69,053 1,005,621 Due after ten through twenty years 2,527,158 112,346 2,414,812 722,625 34,890 687,735 Due after twenty years 1,182,110 55,298 1,126,812 1,076,414 20,569 1,055,845 25,400,873 1,308,536 24,092,337 5,837,840 1,362,890 4,474,950 Deposits 1,155,515 86,891 1,068,624 6,368,859 4,283 6,364,576 Total 26,556,388 1,395,427 25,160,961 12,206,699 1,367,173 10,839,526

Maturities of the technical reserves N 52

2014 Loss and loss adjustment expense reserves Benefit reserve

in EUR thousand gross retro net gross retro net Due in one year 6,873,894 410,537 6,463,357 368,073 14,498 353,575 Annual financial statements Due after one through five years 9,430,724 530,791 8,899,933 1,403,573 342,156 1,061,417 Due after five through ten years 3,604,852 182,255 3,422,597 1,186,478 277,396 909,082 Due after ten through twenty years 2,323,594 100,496 2,223,098 558,283 25,807 532,476 Due after twenty years 1,039,392 46,431 992,961 856,508 11,248 845,260 23,272,456 1,270,510 22,001,946 4,372,915 671,105 3,701,810 Deposits 839,600 106,094 733,506 7,384,217 5,114 7,379,103 Total 24,112,056 1,376,604 22,735,452 11,757,132 676,219 11,080,913

Hannover Re | Annual Report 2015 201 The average maturity of the loss and loss adjustment expense The parameters used to calculate the benefit reserve are inter- reserves was 5.0 years (5.0 years), or 5.0 years (5.0 years) after est income, lapse rates and mortality / morbidity rates. allowance for the corresponding retrocession shares. The benefit reserve had an average maturity of 9.9 years (10.7 years) – The values for the first two components (interest income and or 11.8 years (11.5 years) on a net basis. lapse rates) differ according to the country concerned, product type, investment year etc. The average maturity of the reserves is determined using actuarial projections of the expected future payments. A payment The mortality and morbidity rates used are chosen on the basis pattern is calculated for each homogenous category of our port- of national tables and the insurance industry standard. Empir- folio – making allowance for the business sector, geographical ical values for the reinsured portfolio, where available, are considerations, treaty type and the type of reinsurance – and also taken into consideration. In this context insights into the applied to the outstanding liabilities for each underwriting year gender, age and smoker structure are incorporated into the and run-off status. calculations, and allowance is also made for factors such as product type, sales channel and the frequency of premium The payment patterns are determined with the aid of actuarial payment by policyholders. estimation methods and adjusted to reflect changes in payment behaviour and outside influences. The calculations can also be At the inception of every reinsurance contract, assumptions distorted by major losses, and these are therefore considered about the three parameters are made and locked in for the separately using reference samples or similar losses. The pay- purpose of calculating the benefit reserve. At the same time, ment patterns used can be compared year for year by contrast- safety / fluctuation loadings are built into each of these compo- ing the projected payments with the actual amounts realised. nents. In order to ensure at all times that the originally chosen Liabilities in liability and motor reinsurance traditionally have assumptions continue to be adequate throughout the contract, long durations, sometimes in excess of 20 years, while liabili- checks are made on a regular – normally annual – basis in order ties in property business are settled within the first ten years. to determine whether these assumptions need to be adjusted (“unlocked’). The benefit reserve is established for life, annuity, personal accident and health reinsurance contracts. Based on the dura- The benefit reserve is established in accordance with the prin- tion of these contracts, long-term reserves are constituted for ciples set out in SFAS 60. The provisions are based on the life and annuity policies and predominantly short-term reserves Group companies’ information regarding mortality, interest are set aside for health and personal accident business. and lapse rates.

Development of the benefit reserve N 53

2015 2014

in EUR thousand gross retro net gross retro net Net book value at 31 December of the previous year 11,757,132 676,219 11,080,913 10,631,451 344,154 10,287,297 Currency translation at 1 January 716,643 48,141 668,502 763,126 34,666 728,460 Net book value after currency translation 12,473,775 724,360 11,749,415 11,394,577 378,820 11,015,757 Changes 502,461 401,304 101,157 205,140 176,515 28,625 Portfolio entries / exits (813,517) 245,745 (1,059,262) 126,506 97,290 29,216 Currency translation at 31 December 43,980 (4,236) 48,216 30,909 23,594 7,315 Net book value at 31 December of the year under review 12,206,699 1,367,173 10,839,526 11,757,132 676,219 11,080,913

The development in the year under review was influenced by portfolio withdrawals attributable principally to partial withdrawals for specific underwriting years in relation to our single premium business.

202 Hannover Re | Annual Report 2015 The unearned premium reserve derives from the deferral of unearned premium was estimated using suitable methods. Pre- ceded reinsurance premium. The unearned premium is deter- mium paid for periods subsequent to the date of the balance mined by the period during which the risk is carried and estab- sheet was deferred from recognition within the statement of lished in accordance with the information supplied by ceding income. companies. In cases where no information was received, the

Development of the unearned premium reserve N 54

2015 2014

in EUR thousand gross retro net gross retro net Net book value at 31 December of the previous year 2,748,594 149,257 2,599,337 2,405,497 139,039 2,266,458 Currency translation at 1 January 114,612 6,266 108,346 168,330 9,603 158,727 Net book value after currency translation 2,863,206 155,523 2,707,683 2,573,827 148,642 2,425,185 Corporate Changes – – – – 307 (307) Changes 259,834 3,307 256,527 154,362 (3,294) 157,656 Currency translation at 31 December 36,323 5,193 31,130 20,405 3,602 16,803 Net book value at 31 December of the year under review 3,159,363 164,023 2,995,340 2,748,594 149,257 2,599,337

The adequacy of the technical liabilities arising out of our rein- future income. Should the result of the test indicate that the surance treaties is reviewed as at each balance sheet date. In anticipated future income will not be sufficient to fund future the context of the adequacy testing of technical liabilities (lia- payments, the entire shortfall is recognised in income by first bility adequacy test pursuant to IFRS 4 in conjunction with loss writing off capitalised acquisition costs corresponding to the recognition test as per US GAAP) the anticipated future con- shortfall. Any remaining difference is constituted as an addi- tractual payment obligations are compared with the anticipated tional provision.

6.8 Funds withheld (liabilities) Annual financial statements

The funds withheld under reinsurance treaties totalling maturities of these deposits are matched to the corresponding EUR 1,265.0 million (EUR 817.1 million) represent the cash shares of the reinsurers in the technical provisions. If such a and securities deposits furnished to our company by our ret- share no longer exists the corresponding funds withheld are rocessionaires that do not trigger any cash flows and cannot reduced to the same extent. be realised without the consent of our retrocessionaires. The

6.9 Contract deposits (liabilities)

The contract deposits on the liabilities side decreased balances deriving from non-traditional life insurance contracts by EUR 1,389.8 million in the year under review from that are to be carried as liabilities. The decrease was due prin- EUR 6,072.3 million to EUR 4,682.5 million. The contract cipally to partial withdrawals for specific underwriting years deposits item on the liabilities side essentially encompasses in relation to our UK single premium business.

6.10 Provisions for pensions and other post-employment benefit obligations

Pension commitments are given in accordance with the rele- On 1 April 1993 (1 June 1993 in the case of managerial staff) vant version of the pension plan as amended. The 1968 pension the 1993 pension plan came into effect. This pension plan plan provides for retirement, disability, widows’ and orphans’ provides for retirement, disability and surviving dependants’ benefits. The pension entitlement is dependent on length of benefits. The scheme is based upon annual determination of service; entitlements under the statutory pension insurance the pension contributions, which are calculated according to scheme are taken into account. The pension plan was closed the pensionable employment income and the company’s per- to new participants with effect from 31 January 1981. formance. The pension plan was closed to new participants with effect from 31 March 1999.

Hannover Re | Annual Report 2015 203 From 1997 onwards it has been possible to obtain pension The defined benefit plans expose Hannover Re to the follow- commitments through deferred compensation. The employee- ing actuarial risks: funded commitments included in the provisions for accrued pension rights are protected by an insurance contract with HDI • longevity Lebensversicherung AG, Cologne. • currency • interest rate As at 1 July 2000 the 2000 pension plan came into force for • disablement the entire Group. Under this plan, new employees included in • pension progression the group of beneficiaries are granted an indirect commitment • rate of compensation increase from HDI Unterstützungskasse e. V. This pension plan provides for retirement, disability and surviving dependants’ benefits. Longevity entails the risk that the mortality contained in the actuarial bases does not correspond to the actual mortality and Effective 1 December 2002 Group employees have an opportu- that pension payments have to be rendered and funded for a nity to accumulate additional old-age provision at unchanged longer duration than had been assumed. conditions by way of deferred compensation through membership of HDI Pensionskasse AG. Disablement entails the risk that the assumed number of retirements from the subportfolio of eligible beneficiaries on grounds In addition to these pension plans, managerial staff and mem- of disability does not correspond to the actual experience and bers of the Executive Board, in particular, enjoy individual for this reason increased benefit obligations have to be met. commitments as well as commitments given under the benefits plan of the Bochumer Verband. The pension progression entails the risk that the anticipated development of the consumer price index factored into the The commitments to employees in Germany predominantly trend assumptions was too low and that increased benefit obli- comprise benefit obligations financed by the Group companies. gations arise on account of the pension indexation required The pension plans are unfunded. The provisions for pensions in by law. Germany and abroad were calculated on the basis of uniform standards according to prevailing economic circumstances. The rate of compensation increase entails the risk that the increases in pensionable salaries factored into the trend Provisions for pensions are established in accordance with assumptions on a parallel basis do not adequately reflect the actuarial principles and are based upon the commitments made actual developments. In addition, in the case of plans under by the Hannover Re Group for retirement, disability and wid- which the determinative income components above and below ows’ benefits. The amount of the commitments is determined the income threshold for contributions to the statutory pension according to length of service and salary level. insurance scheme are differently weighted for the purpose of calculating the benefit, there is a risk of a diverging trend in the future with respect to salary and income threshold.

The calculation of the provisions for pensions is based upon the following assumptions:

Measurement assumptions N 55

2015 2014

in % Germany Australia Germany Australia Discount rate 2.36 3.60 1.70 2.60 Rate of compensation increase 2.50 3.50 2.20 3.50 Pension indexation 1.86 3.00 1.65 3.00

204 Hannover Re | Annual Report 2015 The movements in the net pension liability for the Group’s various defined benefit plans were as follows:

Movements in net liability from defined benefit pension plans N 56

2015 2014 2015 2014 2015 2014 Defined benefit obligation Fair value of plan assets Impact of minimum funding in EUR thousand requirement / asset ceiling Position at 1 January of the financial year 187,034 129,602 15,533 13,510 – 75 Recognised in profit or loss Current service costs 4,274 3,149 – – – – Past service cost and plan curtailments 1,285 194 – – – – Net interest component 2,636 4,547 37 393 – 3 8,195 7,890 37 393 – 3 Recognised in cumulative other comprehensive income Actuarial gain (–) / loss (+) from change in biometric assumptions – 11 – – – – Actuarial gain (–) / loss (+) from change in financial assumptions (17,840) 52,930 – – – – Experience gains (–) / losses (+) (1,034) (1,160) – – – – Return on plan assets, excluding amounts included in interest income – – 123 513 – – Change in asset ceiling – – – – – (78) Exchange differences 47 553 14 519 – – (18,827) 52,334 137 1,032 – (78) Other changes Employer contributions – – 5,084 600 – – Benefit payments (20,191) (2,891) (16,247) (2) – –

Additions and disposals (1,155) 99 (225) – – – Annual financial statements Effects of plan settlements (224) – 214 – – – (21,570) (2,792) (11,174) 598 – – Position at 31 December of the financial year 154,832 187,034 4,533 15,533 – –

The plan assets consist exclusively of qualifying insurance pol- The increase in benefit payments from defined benefit obliga- icies as defined by IAS 19. tions to EUR 20.2 million (EUR 2.9 million) as well as from fair values of plan assets to EUR 16.2 million (EUR 0.0 million) in The actuarial gains and losses from the change in financial the year under review resulted largely from entitlements paid assumptions for defined benefit obligations were chiefly influ- out to long-serving senior executives within the Group. enced in the financial year just ended by the increase in the discount rate compared to the previous year.

Hannover Re | Annual Report 2015 205 The reconciliation of the projected benefit obligations with the recognised provisions for pensions is as follows:

Provisions for pensions N 57

in EUR thousand 2015 2014 Projected benefit obligations at 31 December of the financial year 154,832 187,034 Fair value of plan assets at 31 December of the financial year 4,533 15,533 Recognised pension obligations at 31 December of the financial year 150,299 171,501 Provisions for pensions 150,299 171,501

In the current financial year Hannover Re anticipates contribution payments of EUR 0.9 million under the plans set out above. The weighted average duration of the defined benefit obligation is 17.5 (14.8) years.

Sensitivity analysis An increase or decrease in the key actuarial assumptions would have the following effect on the present value of the defined benefit obligation as at the balance sheet date:

Effect on the defined benefit obligation N 58

in EUR thousand Parameter increase Parameter decrease Discount rate (+ / – 0.5%) -12,526 +13,950 Rate of compensation increase (+ / – 0.25%) +492 -714 Pension indexation (+ / – 0.25%) +4,739 -4,523

Furthermore, a change is possible with respect to the assumed mortality rates and lifespans. The underlying mortality tables were adjusted by reducing the mortalities by 10% in order to determine the longevity risk. Extending the lifespans in this way would have produced a EUR 5.0 million (EUR 5.3 million) higher pension commitment at the end of the financial year.

Defined contribution plans In addition to the defined benefit plans, some Group companies have defined contribution plans that are based on length of service and the employee’s income or level of contributions. The expense recognised for these obligations in the financial year in accordance with IAS 19 “Employee Benefits” was EUR 20.0 million (EUR 18.7 million), of which EUR 1.5 million (EUR 1.2 million) was due to obligations to members of staff in key positions and EUR 6.6 million (EUR 6.5 million) to contributions to the statutory pension insurance scheme in Germany.

206 Hannover Re | Annual Report 2015 6.11 Other liabilities

Other liabilities N 59

in EUR thousand 2015 2014 Liabilities from derivatives 170,004 240,246 Interest 30,908 41,781 Deferred income 28,819 31,732 Direct minority interests in partnerships 25,155 28,603 Sundry non-technical provisions 191,711 154,779 Sundry liabilities 252,336 197,093 Total 698,933 694,234

Of this, other liabilities of EUR 10.4 million (EUR 7.6 million) The sundry liabilities include, most notably, distributions within are attributable to affiliated companies. the year of EUR 84.6 million (EUR 87.5 million) from interests in private equity funds that had still to be recognised in income With regard to the liabilities from derivatives in an amount of as at the balance sheet date. EUR 170.0 million (EUR 240.2 million), please see our explanatory remarks on derivative financial instruments in Section 8.1 “Derivative financial instruments and financial guarantees”. Annual financial statements

Hannover Re | Annual Report 2015 207 Development of sundry non-technical provisions N 60

Balance at Currency Balance at Reclassification Changes in Additions Utilisation Release Currency Balance at 31 December translation 1 January of consolidated translation at 31 December 2014 at 1 January the year under group 31 December 2015 in EUR thousand review Provisions for Audits and costs of publishing the annual financial statements 7,400 4 7,404 – 4 5,790 6,058 34 (14) 7,092 Consultancy fees 2,142 61 2,203 (915) – 2,055 1,439 115 16 1,805 Suppliers’ invoices 5,826 100 5,926 – 56 22,718 16,727 588 (345) 11,040 Partial retirement arrangements and early retirement obligations 3,215 10 3,225 – – (499) 206 – (2) 2,518 Holiday entitlements and overtime 8,729 (22) 8,707 – – 4,480 3,951 2 (1) 9,233 Anniversary bonuses 3,359 48 3,407 – – 254 – – 3 3,664 Management bonuses 35,299 661 35,960 – – 23,539 22,435 63 (115) 36,886 Restructuring 4,583 38 4,621 – – – 4,629 – 8 – Other 84,226 611 84,837 915 – 52,278 18,143 531 117 119,473 Total 154,779 1,511 156,290 – 60 110,615 73,588 1,333 (333) 191,711

The maturities of the sundry non-technical provisions as at the balance sheet date are shown in the following table:

Maturities of the sundry non-technical provisions N 61

in EUR thousand 2015 2014 Due in one year 86,075 81,252 Due after one through five years 101,640 69,668 Due after five years 3,996 3,859 Total 191,711 154,779

6.12 Debt and subordinated capital

On 15 September 2014 Hannover Rück SE placed a On 14 September 2010 Hannover Rück SE placed a subordi- EUR 500.0 million subordinated bond on the European cap- nated bond on the European capital market through its subsid- ital market. The issue has a perpetual maturity with a first iary Hannover Finance (Luxembourg) S.A. This subordinated scheduled call option on 26 June 2025 and may be redeemed debt of nominally EUR 500.0 million has a maturity of 30 years at each coupon date thereafter. It carries a fixed coupon of with a first scheduled call option after ten years and may be 3.375% p. a. until 26 June 2025, after which the interest rate redeemed at each coupon date thereafter. The bond carries a basis changes to 3-month EURIBOR +325 basis points. fixed coupon of 5.75% in the first ten years, after which the interest rate basis changes to a floating rate of 3-month EURI- On 20 November 2012 Hannover Rück SE placed a BOR +423.5 basis points. EUR 500.0 million subordinated bond in the European capital market via its subsidiary Hannover Finance (Luxembourg) S.A. The bond has a maturity of approximately 30 years with a first scheduled call option on 30 June 2023 and may be redeemed at each coupon date thereafter. It carries a fixed coupon of 5.00% p. a. until this date, after which the interest rate basis changes to a floating rate of 3-month EURIBOR +430 basis points.

208 Hannover Re | Annual Report 2015 Development of sundry non-technical provisions N 60

The subordinated debt issued in 2005 by Hannover Finance Altogether three (four) subordinated bonds were recog- (Luxembourg) S.A. with a volume of EUR 500.0 million was nised as at the balance sheet date with an amortised cost of called by the issuer in the full nominal amount at the first EUR 1,489.9 million (EUR 1,986.5 million). scheduled redemption date and repaid on 1 June 2015.

Debt and subordinated capital N 62

in EUR thousand 2015 Subordinated loans Coupon Maturity Currency Amortised Fair value Accrued Fair value cost measurement interest Hannover Rück SE, 2014 3.375 n / a EUR 493,950 4,025 8,668 506,643 Hannover Finance Annual financial statements (Luxembourg) S.A., 2012 5.00 2043 EUR 497,246 82,054 12,568 591,868 Hannover Finance (Luxembourg) S.A., 2010 5.75 2040 EUR 498,657 78,838 8,484 585,979 1,489,853 164,917 29,720 1,684,490

Debt 308,483 6,130 1,188 315,801 Other long-term liabilities 1 – – 1 Total 1,798,337 171,047 30,908 2,000,292

Hannover Re | Annual Report 2015 209 Debt and subordinated capital N 63

in EUR thousand 2014 Subordinated loans Coupon Maturity Currency Amortised Fair value Accrued Fair value cost measure- interest ment Hannover Rück SE 2014 3.375 n / a EUR 493,464 8,221 4,947 506,632 Hannover Finance (Luxembourg) S.A., 2012 5.00 2043 EUR 496,922 89,933 12,603 599,458 Hannover Finance (Luxembourg) S.A., 2010 5.75 2040 EUR 498,447 89,653 8,507 596,607 Hannover Finance (Luxembourg) S.A., 2005 5.00 n / a EUR 497,658 8,802 14,589 521,049 1,986,491 196,609 40,646 2,223,746

Debt 283,853 2,839 1,136 287,828 Other long-term liabilities 3 – – 3 Total 2,270,347 199,448 41,782 2,511,577

The aggregated fair value of the extended subordinated loans using other financial assets with similar rating, duration and is based on quoted, active market prices. If such price informa- return characteristics. Under the effective interest rate method tion was not available, fair value was determined on the basis the current market interest rate levels in the relevant fixed-in- of the recognised effective interest rate method or estimated terest-rate periods are always taken as a basis.

Maturities of financial liabilities N 64

2015 Less than Three One to five Five to ten Ten to More than No maturity three months months to years years twenty years twenty years in EUR thousand one year Other financial liabilities 1 55,112 256,058 893 – – – – Debt – 39,047 246,117 23,319 – – – Subordinated loans – – – – – 995,903 493,950 Other long-term liabilities – 1 – – – – – Total 55,112 295,106 247,010 23,319 – 995,903 493,950

1 Excluding minority interests in partnerships, sundry non-technical provisions and derivative financial instruments; the maturities of the latter two items are broken down separately

210 Hannover Re | Annual Report 2015 Maturities of financial liabilities N 65

2014 Less than Three One to five Five to ten Ten to More than No maturity three months months to years years twenty years twenty years in EUR thousand one year Other financial liabilities 1 33,993 236,189 247 – – 176 – Debt 15,259 39 257,789 10,766 – – – Subordinated loans – – – – – 995,369 991,122 Other long-term liabilities – 3 – – – – – Total 49,252 236,231 258,036 10,766 – 995,545 991,122

1 Excluding minority interests in partnerships, sundry non-technical provisions and derivative financial instruments; the maturities of the latter two items are broken down separately

Net gains and losses from debt and subordinated capital N 66

2015 2014 2015 2014 2015 2014

in EUR thousand Ordinary income / expenses Amortisation Net result Debt (11,862) (11,718) 732 593 (11,130) (11,125) Subordinated loans (80,954) (90,432) (3,362) (5,288) (84,316) (95,720) Total (92,816) (102,150) (2,630) (4,695) (95,446) (106,845)

The ordinary expenses principally include interest expenses of nominally EUR 81.0 million (EUR 90.4 million) resulting from the issued subordinated debt. Annual financial statements Other financial facilities Letter of credit (LoC) facilities existed with a number of finan- A number of LoC facilities include standard market clauses that cial institutions as at the balance sheet date. A syndicated letter allow the banks rights of cancellation in the event of material of credit facility taken out in 2011 with a volume equivalent to changes in our shareholding structure or trigger a requirement EUR 915.2 million (EUR 822.7 million) had a term maturing at on the part of Hannover Re to furnish collateral upon materi- the beginning of 2019. It was terminated in January 2016 and alisation of major events, for example if our rating is signifi- partially refinanced through bilateral credit facilities. cantly downgraded. Please see also our explanatory remarks in the “Financial position” section of the management report, Unsecured letter of credit facilities with various terms (matur- page 59 et seq., on the information pursuant to § 315 Para. 4 ing at the latest in 2022) and a total volume equivalent to German Commercial Code (HGB). EUR 2,581.6 million (EUR 2,559.3 million) exist on a bilateral basis with financial institutions. For further information on the letters of credit provided please see our explanatory remarks in Section 8.7 “Contingent liabilities and commitments”.

Hannover Re | Annual Report 2015 211 6.13 Shareholders’ equity and treasury shares

Shareholders’ equity is shown as a separate component of the The Executive Board is authorised, with the consent of the financial statement in accordance with IAS 1 “Presentation of Supervisory Board, to acquire treasury shares – including Financial Statements” and subject to IAS 32 “Financial Instru- through the use of derivatives – up to an amount of 10% of the ments: Disclosure and Presentation” in conjunction with IAS 39 share capital. The authorisation has a time limit of 5 May 2020. “Financial Instruments: Recognition and Measurement”. The change in shareholders’ equity comprises not only the net The Annual General Meeting of Hannover Rück SE resolved income deriving from the statement of income but also the on 6 May 2015 that a gross dividend of EUR 4.25 per share changes in the value of asset and liability items not recognised should be paid for the 2014 financial year. This corresponds to in the statement of income. a total distribution of EUR 512.5 million (EUR 361.8 million). The distribution consists of a dividend of EUR 3.00 per share The common shares (share capital of Hannover Rück SE) and a special dividend of EUR 1.25 per share. amount to EUR 120,597,134.00. They are divided into 120,597,134 voting and dividend-bearing registered ordinary The decrease in the other reserves arising out of currency shares in the form of no-par-value shares. The shares are paid translation, which is recognised in equity, was attributable in in full. Each share carries an equal voting right and an equal an amount of EUR 11.9 million (increase recognised in equity dividend entitlement. of EUR 33.0 million) to the translation of long-term debt or loans with no maturity date extended to Group companies and Conditional capital of up to EUR 60,299 thousand is available. branches abroad. It can be used to grant shares to holders of convertible bonds and bonds with warrants as well as to holders of participat- For the disclosures arising out of IAS 1 “Presentation of Finan- ing bonds with conversion rights and warrants and has a time cial Statements” with regard to the management of capital, the limit of 2 May 2016. reader is referred to the “Financial position” section on page 55 et seq. of the management report.

Treasury shares IAS 1 requires separate disclosure of treasury shares in share- resulted in an expense of EUR 0.3 million (EUR 0.4 million), holders’ equity. As part of this year’s employee share option which was recognised under personnel expenditure, as well as plan Hannover Rück SE acquired altogether 12,922 (21,608) a negligible change in retained earnings recognised in equity. treasury shares during the second quarter of 2015 and deliv- The company was no longer in possession of treasury shares ered them to eligible employees at preferential conditions. as at the balance sheet date. These shares are blocked until 31 May 2019. This transaction

212 Hannover Re | Annual Report 2015 6.14 Non-controlling interests

Non-controlling interests in the shareholders’ equity of subsidi- The non-controlling interest in profit or loss, which forms part aries are reported separately within Group shareholders’ equity of net income and is shown separately after net income as a in accordance with IAS 1 “Presentation of Financial State- “thereof” note, amounted to EUR 64.0 million (EUR 79.5 mil- ments”. They amounted to EUR 709.1 million (EUR 702.2 million) in the year under review. lion) as at the balance sheet date.

Non-controlling interests in partnerships are reported in accordance with IAS 32 “Financial Instruments: Presentation” under long-term liabilities.

Subsidiaries with material non-controlling interests N 67

2015 2014 E+S Rückversicherung AG, in EUR thousand Hannover, Germany Participation of non-controlling interests 35.21% 35.21% Voting rights of non-controlling interests 35.21% 35.21%

Net income 147,794 211,042 thereof attributable to non-controlling interests 52,036 76,341

Income / expense recognised directly in equity (41,416) 95,661 Total recognised income and expense 106,378 306,703

Shareholders’ equity 1,894,706 1,908,328 thereof attributable to non-controlling interests 667,096 671,892 Annual financial statements Dividends paid 120,000 110,000 thereof attributable to non-controlling interests 42,250 39,946

Assets 11,321,496 11,291,744 Liabilities 9,426,790 9,383,417 Cash flow from operating activities 358,705 387,294 Cash flow from investing activities (239,012) (262,061) Cash flow from financing activities (124,365) (111,409)

Hannover Re | Annual Report 2015 213 7. Notes on the individual items of the statement of income

7.1 Gross written premium

The following table shows the breakdown of the gross written premium according to regional origin.

Gross written premium N 68

in EUR thousand 2015 2014 Regional origin Germany 1,368,419 1,225,113 United Kingdom 2,759,809 2,489,788 France 701,380 666,892 Other 1,776,980 1,626,667 Europe 6,606,588 6,008,460

USA 4,318,201 3,242,010 Other 771,729 693,976 North America 5,089,930 3,935,986

Asia 2,950,202 2,214,766 Australia 1,008,059 921,279 Australasia 3,958,261 3,136,045

Africa 503,754 451,265 Other 910,130 830,045 Total 17,068,663 14,361,801

214 Hannover Re | Annual Report 2015 7.2 Investment income

Investment income N 69

in EUR thousand 2015 2014 Income from real estate 140,994 100,341 Dividends 6,928 4,836 Interest income 993,218 949,498 Other investment income 112,303 13,686 Ordinary investment income 1,253,443 1,068,361 Profit or loss on shares in associated companies 19,169 1,042 Appreciation 616 126 Realised gains on investments 234,465 208,077 Realised losses on investments 98,618 25,624 Change in fair value of financial instruments 901 (33,257) Impairments on real estate 28,212 19,924 Impairments on equity securities 1,889 – Impairments on fixed-income securities 2,762 2,000 Impairments on participating interests and other financial assets 5,851 5,760 Other investment expenses 101,202 95,256 Net income from assets under own management 1,270,060 1,095,785 Interest income on funds withheld and contract deposits 462,898 485,088 Interest expense on funds withheld and contract deposits 67,865 109,032 Total investment income 1,665,093 1,471,841

The impairments totalling EUR 15.0 million (EUR 9.2 million) or equity funds in the year under review because their fair val- were attributable in an amount of EUR 2.8 million (EUR 2.0 mil- ues had fallen either significantly (by at least 20%) or for a pro- Annual financial statements lion) to the area of fixed-income securities. Impairments of longed period (for at least nine months) below acquisition cost. EUR 5.9 million (EUR 5.8 million) were taken on alternative These impairments contrasted with write-ups of EUR 0.6 million investments. These were attributable exclusively to private (EUR 0.1 million) made on investment property that had been equity. Impairments of EUR 4.5 million (EUR 1.4 million) were written down in previous periods. The portfolio did not contain recognised on investments in the real estate sector. Impairments any overdue, unadjusted assets as at the balance sheet date since of EUR 1.9 million (EUR 0.0 million) were recognised on equities overdue securities are written down immediately.

Interest income on investments N 70

in EUR thousand 2015 2014 Fixed-income securities – held to maturity 61,439 84,878 Fixed-income securities – loans and receivables 106,911 108,181 Fixed-income securities – available for sale 802,858 734,381 Financial assets – at fair value through profit or loss 3,215 1,810 Other 18,795 20,248 Total 993,218 949,498

The net gains and losses on investments held to maturity, loans Making allowance for the other investment expenses of and receivables and the available-for-sale portfolio shown in EUR 101.2 million (EUR 95.3 million), net income from assets the following table are composed of interest income, realised under own management of altogether EUR 1,270.1 million gains and losses as well as impairments and appreciation. In (EUR 1,095.8 million) was recognised in the year under review. the case of the fixed-income securities at fair value through profit or loss designated in this category and the other financial assets, which include the technical derivatives, income and expenses from changes in fair value are also recognised.

Hannover Re | Annual Report 2015 215 Net gains and losses on investments N 71

2015 Ordinary Realised gains Impairments / Change in Net income from investment and losses appreciation fair value assets under own in EUR thousand income 1 management 2 Held to maturity Fixed-income securities 61,646 981 2,365 – 60,262 Loans and receivables Fixed-income securities 103,734 3,975 – – 107,709 Available for sale Fixed-income securities 733,577 170,517 397 – 903,697 Equity securities 2,117 114 1,889 – 342 Other invested assets 192,983 646 6,694 – 186,935 Short-term investments 18,659 72 – – 18,731 At fair value through profit or loss Fixed-income securities 3,215 110 – (260) 3,065 Other financial assets 1,099 (5,684) – (25,823) (30,408) Other invested assets – (23,525) – 9,468 (14,057) Other 155,582 (11,359) 26,753 17,516 134,986 Total 1,272,612 135,847 38,098 901 1,371,262

1 Including income from associated companies, for reconciliation with the consolidated statement of income 2 Excluding other investment expenses

Net gains and losses on investments N 72

2014 Ordinary Realised gains Impairments / Change in Net income from investment and losses appreciation fair value assets under own in EUR thousand income 1 management 2 Held to maturity Fixed-income securities 85,093 168 – – 85,261 Loans and receivables Fixed-income securities 105,161 15,588 2,000 – 118,749 Available for sale Fixed-income securities 674,992 148,642 – – 823,634 Equity securities 935 394 – – 1,329 Other invested assets 82,850 5,770 5,847 – 82,773 Short-term investments 20,112 215 – – 20,327 At fair value through profit or loss Fixed-income securities 1,810 201 – (1,291) 720 Other financial assets 3,175 337 – (4,612) (1,100) Other invested assets – 788 – (3,014) (2,226) Other 95,275 10,350 19,711 (24,340) 61,574 Total 1,069,403 182,453 27,558 (33,257) 1,191,041

1 Including income from associated companies, for reconciliation with the consolidated statement of income 2 Excluding other investment expenses

216 Hannover Re | Annual Report 2015 7.3 Reinsurance result

Reinsurance result N 73

in EUR thousand 2015 2014 Gross written premium 17,068,663 14,361,801 Ceded written premium 2,219,094 1,781,064 Change in unearned premium (259,834) (154,362) Change in ceded unearned premium 3,307 (3,294) Net premium earned 14,593,042 12,423,081 Other technical income 1,290 1,641 Total net technical income 14,594,332 12,424,722 Claims and claims expenses paid 9,845,561 8,360,442 Change in loss and loss adjustment expense reserve 1,229,846 1,103,730 Claims and claims expenses 11,075,407 9,464,172 Change in benefit reserve 101,157 28,625 Net change in benefit reserve 101,157 28,625 Commissions 3,025,208 2,672,826 Change in deferred acquisition costs 97,673 121,961 Change in provision for contingent commissions (9,106) 28,503 Other acquisition costs 5,652 4,878 Other technical expenses 1,348 7,461 Administrative expenses 398,512 363,859 Net technical result 93,827 (23,641)

With regard to the claims and claims expenses as well as the The administrative expenses amounted to altogether 2.7% change in the benefit reserve the reader is also referred to (2.9%) of net premium earned. Annual financial statements Section 6.7 “Technical provisions”. The change in the benefit reserve relates exclusively to the life and health reinsurance segment.

Other technical income N 74

in EUR thousand 2015 2014 Other technical income (gross) 4,074 2,864 Reinsurance recoverables 2,784 1,223 Other technical income (net) 1,290 1,641

Hannover Re | Annual Report 2015 217 Commissions and brokerage, change in deferred acquisition costs N 75

in EUR thousand 2015 2014 Commissions paid (gross) 3,313,301 2,922,711 Reinsurance recoverables 288,093 249,885

Change in deferred acquisition costs (gross) 119,918 142,026 Reinsurance recoverables 22,245 20,065

Change in provision for contingent commissions (gross) (5,643) 27,119 Reinsurance recoverables 3,463 (1,384)

Commissions and brokerage, change in deferred acquisition costs (net) 2,918,429 2,579,368

Other technical expenses N 76

in EUR thousand 2015 2014 Other technical expenses (gross) 2,180 5,843 Reinsurance recoverables 832 (1,618) Other technical expenses (net) 1,348 7,461

7.4 Other income and expenses

Other income / expenses N 77

in EUR thousand 2015 2014 Other income Exchange gains 374,351 338,895 Reversals of impairments on receivables 10,920 4,448 Income from contracts recognised in accordance with the deposit accounting method 98,377 71,895 Income from services 2,156 11,742 Deconsolidation 412 2,602 Other interest income 43,810 15,310 Sundry income 28,033 18,151 558,059 463,043 Other expenses Other interest expenses 80,258 58,719 Exchange losses 289,467 231,946 Expenses from contracts recognised in accordance with the deposit accounting method 35,718 14,369 Separate value adjustments on receivables 23,570 21,753 Expenses for the company as a whole 57,986 54,962 Depreciation, amortisation, impairments 14,060 13,500 Expenses for services 7,961 10,489 Sundry expenses 52,723 39,115 561,743 444,853 Total (3,684) 18,190

The separate value adjustments were attributable to accounts receivable in an amount of EUR 23.6 million (EUR 21.7 million).

218 Hannover Re | Annual Report 2015 7.5 Taxes on income

Domestic taxes on income, comparable taxes on income at deferred taxes of the major domestic companies. It is arrived foreign subsidiaries as well as deferred taxes in accordance at from the unchanged corporate income tax rate of 15.0%, with IAS 12 “Income Taxes” are recognised under this item. the unchanged German solidarity surcharge of 5.5% and a trade earnings tax rate of 16.8% (16.1%). The deferred taxes The reader is referred to the remarks in Section 3.2 “Summary at the companies abroad were calculated using the applicable of major accounting policies” regarding the basic approach to country-specific tax rates. the recognition and measurement of deferred taxes. Tax-relevant bookings on the Group level are made using Effective 1 January 2016 the raising of the trade tax multi- the Group tax rate unless they refer specifically to individual plier for the City of Hannover from 460.0% to 480.0% was companies. approved. Deferred tax liabilities on profit distributions of significant A tax rate of 32.63% (rounded to 32.7%; previous year: affiliated companies are established in the year when they are 31.93%, rounded to 32.0%) was therefore used to calculate the received.

Breakdown of taxes on income The breakdown of actual and deferred income taxes was as follows:

Income tax N 78

in EUR thousand 2015 2014 Actual tax for the year under review 261,328 283,911 Actual tax for other periods 16,620 (16,190) Deferred taxes due to temporary differences 186,579 52,937 Deferred taxes from loss carry-forwards (24,905) (1,288) Change in deferred taxes due to changes in tax rates 21,548 –

Value adjustments on deferred taxes (4,963) (13,807) Annual financial statements Total 456,207 305,563

Domestic / foreign breakdown of recognised tax expenditure / income N 79

in EUR thousand 2015 2014 Current taxes Germany 195,884 182,541 Abroad 82,064 85,181 Deferred taxes Germany 186,898 53,289 Abroad (8,639) (15,448) Total 456,207 305,563

Hannover Re | Annual Report 2015 219 The following table presents a breakdown of the deferred tax assets and liabilities into the balance sheet items from which they are derived.

Deferred tax assets and deferred tax liabilities of all Group companies N 80

in EUR thousand 2015 2014 Deferred tax assets Tax loss carry-forwards 118,379 94,401 Loss and loss adjustment expense reserves 465,568 210,604 Benefit reserve 156,986 79,596 Other technical / non-technical provisions 616,979 380,690 Funds withheld 553,500 620,013 Deferred acquisition costs 41,907 44,298 Accounts receivable / reinsurance payable 68,102 78,881 Valuation differences relating to investments 84,551 31,308 Contract deposits 9,656 754 Other valuation differences 41,680 38,410 Value adjustments 1 (45,352) (51,544) Total 2,111,956 1,527,411 Deferred tax liabilities Loss and loss adjustment expense reserves 388,350 45,563 Benefit reserve 124,232 100,324 Other technical / non-technical provisions 176,491 482,658 Equalisation reserve 1,214,395 1,114,641 Funds withheld 891,975 476,105 Deferred acquisition costs 232,798 218,590 Accounts receivable / reinsurance payable 143,235 109,280 Valuation differences relating to investments 316,775 401,707 Present value of future profits on acquired life reinsurance portfolios (PVFP) 9,783 10,299 Other valuation differences 113,144 49,912 Total 3,611,178 3,009,079 Deferred tax liabilities 1,499,222 1,481,668

1 Thereof on tax loss carry-forwards: -EUR 44,737 thousand (-EUR 50,927 thousand)

The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting:

Netting of deferred tax assets and deferred tax liabilities N 81

in EUR thousand 2015 2014 Deferred tax assets 433,500 393,923 Deferred tax liabilities 1,932,722 1,875,591 Net deferred tax liabilities 1,499,222 1,481,668

220 Hannover Re | Annual Report 2015 In view of the unrealised gains on investments and on currency The following table presents a reconciliation of the expected translation recognised directly in equity in the financial year, expense for income taxes with the actual expense for income actual and deferred tax income – including amounts attribut- taxes reported in the statement of income. The pre-tax result able to non-controlling interests – of EUR 142.8 million (tax is multiplied by the Group tax rate in order to calculate the expenditure of EUR 258.2 million) was also recognised directly Group’s expected expense for income taxes. in equity.

Reconciliation of the expected expense for income taxes with the actual expense N 82

in EUR thousand 2015 2014 Profit before taxes on income 1,670,920 1,370,670 Group tax rate 32% 32% Expected expense for income taxes 534,694 438,614 Change in tax rates 21,548 – Differences in tax rates affecting subsidiaries (120,541) (90,919) Non-deductible expenses 66,902 54,025 Tax-exempt income (39,216) (52,854) Tax expense / income not attributable to the reporting period 16,117 (34,269) Value adjustments on deferred taxes / loss carry-forwards (4,963) (13,807) Trade tax modifications (24,597) (660) Other 6,263 5,433 Actual expense for income taxes 456,207 305,563

The expense for income taxes in the financial year was result. In addition, the increase in the trade tax multiplier of the EUR 150.6 million higher than in the previous year at City of Hannover led to a rise in the expense for deferred taxes. EUR 456.2 million (EUR 305.6 million). The increase is due in large measure to the sharp rise year-on-year in the pre-tax The effective tax rate amounted to 27.3% (22.3%). Annual financial statements Availability of non-capitalised loss carry-forwards Unused tax loss carry-forwards and tax credits of EUR 455.4 mil- No deferred taxes were established on liabilities-side tax- lion (EUR 352.8 million) existed as at the balance sheet date. able temporary differences amounting to EUR 57.5 mil- Making allowance for local tax rates, EUR 164.4 million lion (EUR 52.3 million as well as assets-side differences of (EUR 183.1 million) thereof was not capitalised since realisa- EUR 135.0 million) in connection with interests in Group com- tion is not sufficiently certain. panies because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.

Availability of loss carry-forwards that have not been capitalised:

Expiry of non-capitalised loss carry-forwards and temporary differences N 83

One to five Six to ten More than Unlimited Total in EUR thousand years years ten years Temporary differences – – – 3,237 3,237 Loss carry-forwards – – – 161,167 161,167 Total – – – 164,404 164,404

Hannover Re | Annual Report 2015 221 8. Other notes

8.1 Derivative financial instruments and financial guarantees

Derivatives are financial instruments, the fair value of which is In the course of the second quarter of the year under review derived from an underlying instrument such as equities, bonds, derivative financial instruments held to hedge inflation risks indices or currencies. We use derivative financial instruments within the loss reserves were disposed of in a total volume of in order to hedge parts of our portfolio against interest rate EUR 67.9 million, allowing for a negative exchange rate effect and market price risks, optimise returns or realise intentions of EUR 4.3 million. These derivative instruments were recog- to buy / sell. In this context we take special care to limit the nised under other liabilities in an amount of EUR 63.6 million risks, select first-class counterparties and adhere strictly to as at the balance sheet date of the previous year. the standards defined by investment guidelines. In order to hedge the risk of share price changes in connec- The fair values of the derivative financial instruments were tion with the stock appreciation rights granted under the share determined on the basis of the market information available award plan, Hannover Re has taken out hedges since 2014 at the balance sheet date. Please see Section 3.2 “Summary in the form of so-called equity swaps. The fair value of these of major accounting policies” with regard to the measurement instruments amounted to EUR 2.0 million (EUR 1.1 million) models used. as at the balance sheet date and was recognised under other financial assets at fair value through profit or loss. The hedge Hannover Re holds derivative financial instruments to hedge gave rise to an increase in equity from hedging instruments interest rate risks from loans connected with the financing of recognised directly in equity in an amount of EUR 5.9 mil- real estate; these gave rise to recognition of other liabilities lion (EUR 1.1 million); ineffective components of the hedge in an amount of EUR 3.6 million (EUR 4.0 million) and other were recognised in a minimal amount under other investment financial assets at fair value through profit or loss in an amount expenses. of EUR 0.1 million (EUR 0.5 million). The maturities of the fair values and notional values of the Hannover Re’s portfolio contained derivative financial instru- hedging instruments described above can be broken down ments as at the balance sheet date in the form of forward as follows: exchange transactions taken out to hedge currency risks. These transactions gave rise to recognition of other liabilities in an amount of EUR 3.1 million (EUR 30.6 million) and other financial assets at fair value through profit or loss in an amount of EUR 15.0 million (EUR 14.5 million). The increase in equity from hedging instruments recognised directly in equity pursuant to IAS 39 in an amount of EUR 3.6 million derived solely from the forward exchange transactions taken out to hedge currency risks from long-term investments in foreign operations. These hedging instruments resulted in the recognition of other assets in an amount of EUR 2.7 million. Ineffective components of the hedge were recognised in profit or loss under other investment expenses in an amount of EUR 0.8 million.

222 Hannover Re | Annual Report 2015 Maturity structure of derivative financial instruments N 84

2015 Less than One to five years Five to ten years 31.12.2015 in EUR thousand one year Interest rate hedges Fair values (709) (2,776) – (3,485) Notional values 83,781 119,813 – 203,594 Currency hedges Fair values 8,891 2,403 561 11,855 Notional values 655,412 33,122 6,396 694,930 Share price hedges Fair values 1,999 – – 1,999 Notional values 25,486 – – 25,486 Total hedging instruments Fair values 10,181 (373) 561 10,369 Notional values 764,679 152,935 6,396 924,010

Maturity structure of derivative financial instruments N 85

2014 Less than One to five years Five to ten years 31.12.2014 in EUR thousand one year Interest rate hedges Fair values (90) (3,861) 469 (3,482) Notional values 15,269 156,817 36,199 208,285 Currency hedges Fair values (13,464) (2,634) – (16,098)

Notional values 760,668 26,860 – 787,528 Annual financial statements Inflation hedges Fair values (36,263) (27,325) – (63,588) Notional values 1,568,881 322,131 – 1,891,012 Share price hedges Fair values 1,066 – – 1,066 Notional values 17,344 – – 17,344 Total hedging instruments Fair values (48,751) (33,820) 469 (82,102) Notional values 2,362,162 505,808 36,199 2,904,169

The net changes in the fair value of these instruments resulted in an improvement of EUR 4.0 million in the result of the financial year (charge to the result of EUR 32.9 million).

Hannover Re enters into derivative transactions on the basis of standardised master agreements that contain master netting agreements. The netting agreements set out below normally do not meet the criteria for netting in the balance sheet, since Hannover Re has no legal right whatsoever at the present moment in time to netting of the recognised amounts. The right to netting can, as a matter of principle, only be enforced upon occurrence of certain future defined events. Collateral furnished or received is recognised per counterparty up to at most the amount of the respective net liability or net asset.

Hannover Re | Annual Report 2015 223 Netting agreements N 86

2015 Fair value Netting Cash Other Net amount agreement collateral collateral received / received / in EUR thousand furnished furnished Derivative receivables 17,881 1,678 5,081 1,802 9,320 Derivative liabilities 3,146 1,678 – – 1,468

Netting agreements N 87

2014 Fair value Netting Cash Other collat- Net amount agreement collateral eral received / received / furnished in EUR thousand furnished Derivative receivables 13,899 2,307 10,140 – 1,452 Derivative liabilities 94,188 2,307 – 77,636 14,245

Derivative financial instruments in connection with reinsurance A number of treaties in life and health reinsurance meet cri- A number of transactions concluded in the life and health rein- teria which require application of the prescriptions in IFRS 4 surance business group in previous years, under which Han- “Insurance Contracts” governing embedded derivatives. These nover Re companies offer their contracting parties coverage accounting regulations require that certain derivatives embed- for risks from possible future payment obligations arising out ded in reinsurance contracts be separated from the underlying of hedging instruments, are also to be classified as derivative insurance contract (“host contract”), reported separately at fair financial instruments. The payment obligations result from con- value in accordance with IAS 39 “Financial Instruments: Recog- tractually defined events and relate to the development of an nition and Measurement” and recognised under investments. underlying group of primary insurance contracts with statutory Fluctuations in the fair value of the derivative components are reserving requirements. The contracts are to be categorised to be recognised through profit and loss in subsequent periods. and recognised as stand-alone credit derivatives pursuant to IAS 39. These derivative financial instruments were carried in Within the scope of the accounting of “modified coinsurance” equity on initial recognition because receivables recognised and “coinsurance funds withheld” (ModCo) reinsurance trea- under other assets were to be carried in the same amount. ties, under which securities deposits are held by the ceding Please see Section 6.6 “Other assets”. The fair value of these companies and payments rendered on the basis of the income instruments was EUR 156.1 million (EUR 136.5 million) on from certain securities of the ceding company, the interest-rate the balance sheet date and was recognised under other liabil- risk elements are clearly and closely related to the underly- ities. The change in value in subsequent periods is depending reinsurance arrangements. Embedded derivatives con- ent upon the risk experience and led to an improvement of sequently result solely from the credit risk of the underlying EUR 17.8 million (EUR 6.3 million) in investment income in securities portfolio. the financial year.

Hannover Re calculates the fair values of the embedded deriva- All in all, application of the standards governing the accounting tives in ModCo treaties using the market information available for derivatives in connection with the technical account led to on the valuation date on the basis of a “credit spread” method. recognition of assets totalling EUR 24.5 million (EUR 51.4 mil- Under this method the derivative is valued at zero on the date lion) as well as recognition of liabilities in an amount of when the contract commences and its value then fluctuates EUR 163.3 million (EUR 142.2 million) from the derivatives over time according to changes in the credit spreads of the resulting from technical items as at the balance sheet date. securities. The derivative had a positive value of EUR 23.2 mil- Increases in investment income amounting to EUR 18.5 million (EUR 44.8 million) as at the balance sheet date and was lion (EUR 11.4 million) as well as charges to income of recognised under other financial assets at fair value through EUR 29.7 million (EUR 7.5 million) were recognised in the profit or loss. year under review from all separately measured derivatives in connection with the technical account. In the course of the year the change in the fair value of the derivative gave rise to a charge against investment income of EUR 26.1 million before tax (EUR 6.8 million).

224 Hannover Re | Annual Report 2015 Financial guarantees Structured transactions were entered into in the life and the event of a claim are reimbursed by the parent companies of health reinsurance business group in order to finance stat- the cedants by way of compensation agreements. In this case utory reserves (so-called Triple-X or AXXX reserves) of US the reimbursement claims from the compensation agreements ceding companies. In each case such structures necessitated are to be capitalised separately from and up to the amount of the involvement of a special purpose entity. The special pur- the provision. pose entities carry extreme mortality risks securitised by the cedants above a contractually defined retention and transfer Under IAS 39 these transactions are to be recognised at fair these risks by way of a fixed / floating swap to a member com- value as financial guarantees. To this end Hannover Re uses pany of the Hannover Re Group. The total amount of the con- the net method, according to which the present value of the tractually agreed capacities of the transactions is equivalent to agreed fixed swap premiums is netted with the present value EUR 3,544.4 million (EUR 3,079.4 million); an amount equiv- of the guarantee commitment. The fair value on initial recog- alent to EUR 2,483.4 million (EUR 1,887.0 million) had been nition therefore amounted to zero. The higher of the fair value taken up as at the balance sheet date. The variable payments and the amount carried as a provision on the liabilities side to the special purpose entities that are guaranteed by the Han- pursuant to IAS 37 is recognised at the point in time when nover Re Group cover their payment obligations. Under some utilisation is considered probable. This was not the case as at of the transactions the payments resulting from the swaps in the balance sheet date.

8.2 Related party disclosures

IAS 24 “Related Party Disclosures” defines related parties as Companies belonging to the Talanx Group granted the Han- group entities of a common parent, associated entities, legal nover Re Group insurance protection inter alia in the areas entities under the influence of key management personnel and of public liability, building, contractors all risks, group acci- the key management personnel of the entity itself. Transactions dent and business travel insurance. Divisions of Talanx AG between Hannover Rück SE and its subsidiaries, which are to be also performed services for us in the areas of taxes and gen- regarded as related parties, were eliminated through consolida- eral administration. tion and are therefore not discussed in the notes to the consolidated financial statement. In the year under review the following Talanx Reinsurance Broker AG grants Hannover Rück SE and significant business relations existed with related parties. E+S Rückversicherung AG a preferential position as reinsurers Annual financial statements of cedants within the Talanx Group. In addition, Hannover Rück Talanx AG holds an unchanged majority interest of 50.22% in SE and E+S Rückversicherung AG are able to participate in the Hannover Rück SE. For its part, HDI-Haftpflichtverband der protection covers on the retention of Group cedants and share Deutschen Industrie Versicherungsverein auf Gegenseitigkeit, in the protection afforded by them. In certain circumstances Hannover, (HDI), holds a stake of 79.0% in Talanx AG and Hannover Rück SE and E+S Rückversicherung AG are obliged therefore indirectly holds 39.7% (rounded) of the voting rights to assume unplaced shares of the reinsurance of Group cedants in Hannover Rück SE. from Talanx Reinsurance Broker AG.

The business relationship between Hannover Rück SE and its The Hannover Re Group provides reinsurance protection for subsidiary E+S Rückversicherung AG is based on a coopera- the HDI Group. To this extent, numerous underwriting busi- tion agreement. A retrocession by Hannover Rück SE to E+S ness relations exist with related parties in Germany and abroad Rückversicherung AG exists in property and casualty reinsur- which are not included in Hannover Re’s consolidation. This ance. The exclusive responsibilities of E+S Rückversicherung includes business both assumed and ceded at usual market AG for German business and of Hannover Rück SE for inter- conditions. For the year under review and the previous year national markets have been preserved. these business relations can be broken down as follows:

Hannover Re | Annual Report 2015 225 Business assumed and ceded in Germany and abroad N 88

2015 2014 Premium Underwriting Premium Underwriting in EUR thousand result result Business assumed Property and casualty reinsurance 579,410 (67,022) 462,040 27,104 Life and health reinsurance 158,803 23,909 156,206 27,905 738,213 (43,113) 618,246 55,009 Business ceded Property and casualty reinsurance (10,784) (2,377) (11,713) (8,993) Life and health reinsurance (67,276) (10,963) (44,478) (8,503) (78,060) (13,340) (56,191) (17,496) Total 660,153 (56,453) 562,055 37,513

The reinsurance relationships with related parties in the year Furthermore, IT and management services were performed under review are shown with their total amounts in the table. for Talanx Reinsurance Broker AG, Hannover, under service contracts. In the context of a bond issue by Talanx AG the Group companies Hannover Rück SE and E+S Rückversicherung AG invested Actuarial opinions with respect to the pension commitments in a nominal amount of EUR 47.0 million in the issued bearer given to staff are drawn up for Hannover Rück SE and E+S debt, which has a coupon of 3.125%. The carrying amount of Rückversicherung AG by Talanx Pensionsmanagement AG the instrument, which is recognised under fixed-income secu- and HDI Lebensversicherung AG under an actuarial service rities held to maturity, was EUR 48.3 million (EUR 48.3 million) contract. including accrued interest of EUR 1.3 million (EUR 1.3 million). Talanx AG performs various services in the area of taxes for HDI Lebensversicherung AG, Cologne, participated in a nom- a number of investment vehicles of the Hannover Re Group inal amount of EUR 50.0 million in the subordinated bond in the asset classes of private equity and real estate. In this issued by Hannover Rück SE in September 2014 with a cou- regard corresponding agreements have been concluded with pon of 3.375%. altogether 14 Hannover Re companies.

Within the contractually agreed framework Talanx Asset Man- Since 2012 a service agreement has existed between Hannover agement GmbH performs investment and asset management Rück SE and Talanx AG regarding the purchase of services for services for Hannover Rück SE and some of its subsidiaries. operation of data acquisition software. Assets in special funds are managed by Ampega Investment GmbH. Talanx Immobilien Management GmbH performs Hannover Rück SE has concluded a service contract with Talanx services for Hannover Re under a number of management Service AG in the area of flight services as well as a contract contracts. regarding the reciprocal provision of business continuity management services. In 2014 Hannover Rück SE reached an agreement with Talanx Asset Management GmbH that allows Talanx Asset Manage- ment GmbH to use software for checking sanctions lists.

Under long-term lease arrangements companies belonging to the Hannover Re Group rented out business premises in 2015 to Talanx Service AG, Hannover. In addition, lease agreements exist with Talanx Service AG for use of a portion of the space in our data-processing computer centre.

226 Hannover Re | Annual Report 2015 Remuneration and shareholdings of the management boards of the parent company The remuneration of the active members of the Executive Furthermore, above and beyond the aforementioned remuner- Board of Hannover Re amounted to altogether EUR 8.1 million ation as Supervisory Board members at Group companies, the (EUR 7.6 million). The total remuneration (excluding pension members of the Supervisory Board were not in receipt of any payments) of former members of the Executive Board and their remuneration or benefits for personally rendered services as surviving dependants stood at EUR 0.7 million (EUR 0.8 mil- defined by Item 5.4.6 Para. 3 of the German Corporate Gov- lion). The pension payments to previous members of the ernance Code. Executive Board and their surviving dependants, for whom 16 (16) pension commitments existed, totalled EUR 1.6 mil- All other information on the remuneration of the governing lion (EUR 1.5 million) in the year under review; altogether, a bodies, directors’ dealings and shareholdings as well as the provision of EUR 25.0 million (EUR 28.8 million) has been set structure of the remuneration system for the Executive Board is aside for these commitments. contained in the remuneration report from page 103 onwards. This remuneration report is based on the recommendations of The total remuneration of the Supervisory Board of Hannover the German Corporate Governance Code and contains infor- Re amounted to EUR 0.9 million (EUR 0.9 million). There are mation which also forms part of the notes to the 2015 con- no pension commitments to former members of the Super solidated financial statement as required by IAS 24 “Related visory Board or their surviving dependants. Party Disclosures”. In addition, we took into account the more specific provisions of DRS 17 “Reporting on the Remuneration The members of the governing bodies did not receive any of Members of Governing Bodies”. Under German commercial advances or loans in the year under review. Nor were there law, too, this information includes data specified as mandatory any other material reportable circumstances or contractual for the notes (§ 314 HGB) and the management report (§ 315 relationships as defined by IAS 24 between companies of the HGB). These details are discussed as a whole in the remuner- Hannover Re Group and the members of the governing bodies ation report. Consequently, we have not provided any further or their related parties in the year under review. explanation in the notes.

8.3 Share-based payment

In the 2015 financial year the following share-based payment 1. Stock Appreciation Rights Plan (in effect since 2000, plans with cash settlement existed within the Hannover Re cancelled in stages from 2011 onwards and currently Annual financial statements Group: being wound up) 2. Share Award Plan (valid since 2011)

Stock Appreciation Rights Plan With effect from 1 January 2000 the Executive Board of Han- Stock appreciation rights were first granted for the 2000 finan- nover Rück SE, with the consent of the Supervisory Board, cial year and were awarded separately for each subsequent introduced a virtual stock option plan that provides for the financial year (allocation year) until cancellation of the plan, granting of stock appreciation rights to certain managerial provided the performance criteria defined in the Conditions staff. The content of the stock option plan is based solely on for the Granting of Stock Appreciation Rights were satisfied. the Conditions for the Granting of Stock Appreciation Rights. All the members of the Group’s management are eligible for The maximum period of the stock appreciation rights is ten the award of stock appreciation rights. Exercise of the stock years, commencing at the end of the year in which they are appreciation rights does not give rise to any entitlement to the awarded. Stock appreciation rights which are not exercised by delivery of shares of Hannover Rück SE, but merely to payment the end of the 10-year period lapse. Stock appreciation rights of a cash amount linked to the performance of the Hannover may only be exercised after a waiting period and then only Rück SE share. within four exercise periods each year. Upon expiry of a four- year waiting period a maximum 60% of the stock appreciation The Conditions for the Granting of Stock Appreciation Rights rights awarded for an allocation year may be exercised. The were cancelled for all eligible recipients. Awarded stock appre- waiting period for each additional 20% of the stock appreci- ciation rights continue to be exercisable until the end of their ation rights awarded for this allocation year to a member of period of validity. the managerial staff is one further year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day after the date of publication of the quarterly report of Hannover Rück SE.

Hannover Re | Annual Report 2015 227 Upon exercise of a stock appreciation right the amount paid In the event of cancellation or termination of the employment out to the entitled party is the difference between the basic relationship as a consequence of a termination agreement or price and the current market price of the Hannover Rück SE a set time limit, a holder of stock appreciation rights is entitled share at the time of exercise. In this context, the basic price to exercise all such rights in the first exercise period thereaf- corresponds to the arithmetic mean of the closing prices of ter. Stock appreciation rights not exercised in this period and the Hannover Rück SE share on all trading days of the first full those in respect of which the waiting period has not yet expired calendar month of the allocation year in question. The current shall lapse. Retirement, disability or death of the member of market price of the Hannover Rück SE share at the time when management shall not be deemed to be termination of the stock appreciation rights are exercised is determined by the employment relationship for the purpose of exercising stock arithmetic mean of the closing prices of the Hannover Rück appreciation rights. SE share on the last twenty trading days prior to the first day of the relevant exercise period. The allocations for the years 2007, 2009 to 2011 gave rise to commitments in the 2015 financial year shown in the following The amount paid out is limited to a maximum calculated as a table. No allocations were made for the years 2005 or 2008. quotient of the total volume of compensation to be granted in the allocation year and the total number of stock appreciation rights awarded in the year in question.

Stock appreciation rights of Hannover Rück SE N 89

Allocation year 2011 2010 2009 2007 2006 Award date 15.3.2012 8.3.2011 15.3.2010 28.3.2008 13.3.2007 Period 10 years 10 years 10 years 10 years 10 years Waiting period 4 years 4 years 2 years 2 years 2 years Basic price (in EUR) 40.87 33.05 22.70 34.97 30.89 Participants in year of issue 143 129 137 110 106 Number of rights granted 263,515 1,681,205 1,569,855 926,565 817,788 Fair value at 31 December 2015 (in EUR) 32.13 8.92 8.76 10.79 10.32 Maximum value (in EUR) 32.21 8.92 8.76 10.79 10.32 Weighted exercise price – 8.92 8.76 10.79 10.32 Number of rights existing at 31 December 2015 247,342 704,365 62,968 10,799 – Provisions at 31 December 2015 (in EUR million) 7.00 5.74 0.55 0.17 – Amounts paid out in the 2015 financial year (in EUR million) – 8.00 2.48 0.16 0.05 Expense in the 2015 financial year (in EUR million) 2.57 0.98 – – –

The existing stock appreciation rights are valued on the basis 4,831 stock appreciation rights from the 2006 allocation year, of the Black-Scholes option pricing model. 14,362 stock appreciation rights from the 2007 allocation year, 282,722 stock appreciation rights from the 2009 allocation year The calculations were based on the price of the Hannover Re and 896,118 stock appreciation rights from the 2010 alloca- share of EUR 109.95 as at the reference date of 17 December tion year were exercised. The total amount paid out stood at 2015, expected volatility of 23.48% (historical volatility on a EUR 10.7 million. five-year basis), an expected dividend yield of 2.86% and risk- free interest rates of 0.36% for the 2007 allocation year, 0.19% On this basis the aggregate provisions – included in the sun- for the 2009 allocation year, 0.06% for the 2010 allocation year dry non-technical provisions – amounted to EUR 13.5 million and 0.07% for the 2011 allocation year. for the 2015 financial year (EUR 20.5 million). The expense totalled altogether EUR 3.6 million (EUR 7.8 million). In the 2015 financial year the waiting period expired for 100% of the stock appreciation rights awarded in 2006, 2007 and 2009 and for 60% of those awarded in 2010.

228 Hannover Re | Annual Report 2015 Share Award Plan With effect from the 2011 financial year the Supervisory Board The share awards are granted automatically without any of Hannover Rück SE implemented a Share Award Plan for the requirement for a declaration. Following expiry of a vesting members of the Executive Board of Hannover Re; this provides period of four years the value of one Hannover Re share cal- for the granting of stock participation rights in the form of culated at the disbursement date is paid out for each share virtual shares (referred to as “share awards”). The Executive award. This value is calculated according to the provisions of Board of Hannover Re decided to adopt a Share Award Plan for the preceding paragraph. certain management levels at Hannover Re as well with effect from the 2012 financial year. The eligible recipient shall be paid an amount that corresponds to the sum total of the values of the share awards calculated The Share Award Plan replaces the cancelled Stock Apprecia- at the disbursement date for which the vesting period of four tion Rights Plan. Please see our remarks under “Stock Appre- years has expired. The amount is to be paid in the month after ciation Rights Plan” in this section. The share awards do not expiry of the determinative period for calculating the value per establish any claim against Hannover Re to the delivery of share according to the preceding paragraphs. stock, but merely to payment of a cash amount in accordance with the conditions set out below. In addition, upon payment of the value of the share awards, a sum shall be paid out in the amount of the dividend insofar The members of the Executive Board and management of Han- as dividends were distributed to shareholders. The amount of nover Re who are eligible recipients under the Share Award the dividend is the sum total of all dividends per share paid out Plan are those who have been allowed a contractual claim to the during the term of the share awards multiplied by the number granting of share awards and whose service / employment rela- of share awards due for disbursement to the eligible recipient tionship exists at the time when the share awards are granted at the disbursement date. In the event of early disbursement of and does not end through cancellation or a termination agree- the share awards, the value of the dividends shall only be paid ment on an effective date prior to expiry of the vesting period. out for the period until occurrence of the event that triggers early disbursement. No pro rata allowance shall be made for Share awards are granted separately for the first time for the dividends that have not yet been distributed. 2011 financial year and then for each financial year (allocation year) thereafter. In the event that the Board mandate or service relationship with the member of the Executive Board or the employment The total number of share awards granted is based on the value relationship with the manager ends, the eligible recipient shall Annual financial statements per share of Hannover Rück SE. The value per share is estab- retain his claims to payment of the value of already granted lished according to the unweighted arithmetic mean of the share awards after expiry of the applicable vesting period, Xetra closing prices of the Hannover Re share. In the conditions unless such termination is based on resignation of office / vol- applicable to members of the Executive Board a period of five untary termination on the part of the member of the Executive trading days before to five trading days after the meeting of Board or voluntary termination on the part of the manager or the Supervisory Board that approves the consolidated financial dismissal by Hannover Re for a compelling reason. In the event statement for the financial year just-ended is envisaged for the of death the claims arising out of the already granted and / or calculation. For senior executives a period of twenty trading still to be granted share awards pass to the heirs. days before to ten trading days after the meeting of the Super- visory Board that approves the consolidated financial statement Any entitlement to the granting of share awards after leaving for the financial year just-ended has been agreed. The total the company is excluded. This shall not apply with respect to number of share awards granted is established by dividing claims to variable remuneration acquired (pro rata) in the last the amount available for the granting of share awards to the year of service of the eligible recipient in the event of exit from respective eligible recipients by the value per share, rounded the company on account of non-reappointment, occurrence of up to the next full share. For members of the Executive Board the pensionable event or death. 20% and for senior executives 40% or 35% – according to management levels – of the defined variable remuneration shall be granted in the form of share awards.

Hannover Re | Annual Report 2015 229 The Share Award Plan of Hannover Rück SE gives rise to the amounts shown in the following table.

Share awards of Hannover Rück SE N 90

Allocation year 2015 2014 2013 2012 2011 Probable Financial Probable Financial Probable Financial Probable Financial Probable allocation allocation allocation allocation allocation allocation allocation allocation allocation 2015 for 2014 for 2013 for 2012 for 2014 2013 2012 2011 Valuation date 30.12.2015 24.3.2015 30.12.2014 25.3.2014 30.12.2013 21.3.2013 28.12.2012 21.3.2012 30.12.2011 Value per share award in EUR 105.65 87.26 74.97 61.38 62.38 59.86 58.96 42.09 38.33 Number of allocated share awards in the allocation year Executive Board 9,355 12,172 13,308 16,631 14,418 16,452 16,053 22,232 24,390 Senior executives 65,107 85,460 85,159 99,783 91,660 102,900 100,531 – – Other adjustments 1 – (2,214) – (4,046) – (5,007) – – – Total 74,462 95,418 98,467 112,368 106,078 114,345 116,584 22,232 24,390

1 The other adjustments result from originally granted share awards that have since lapsed.

Development of the provision for share awards of Hannover Rück SE N 91

Allocation year Total

in EUR thousand 2015 2014 2013 2012 2011 Allocation 2011 – – – – 289 289 Allocation 2012 – – – 1,839 409 2,248 Allocation 2013 – – 1,426 1,442 285 3,153 Allocation 2014 – 1,534 2,364 2,549 529 6,976 Provision at 31 December of the previous year – 1,534 3,790 5,830 1,512 12,666 Allocation 2015 1,658 3,102 4,288 5,020 1,036 15,104 Provision at 31 December of the year under review 1,658 4,636 8,078 10,850 2,548 27,770

The aggregate provision – recognised under the sundry (EUR 7.0 million). This consists of the expense for share awards non-technical provisions – amounted to EUR 27.8 million of the 2015 financial year as well as the dividend claim and (EUR 12.7 million) as at the balance sheet date. the additionally earned portion of the share awards granted in earlier financial years. The value of the share awards finally The personnel expense for share awards in the case of mem- granted is also influenced by movements in the share price. The bers of the Executive Board is spread on an accrual basis across sum total of the dividends included in the expenditures on per- the relevant term of the share awards or the shorter term of sonnel for earlier financial years amounted to EUR 1.4 million the service contracts; in the case of senior executives the per- (EUR 0.8 million). The distributed dividend is recognised, with sonnel expense is spread across the relevant term of the share no allowance made for expected dividend payments. Dividend awards. The allocation of the financial year recognised in the claims are recognised in the discounted amounts. expenditures on personnel totalled altogether EUR 15.1 million

230 Hannover Re | Annual Report 2015 8.4 Staff and expenditures on personnel

Staff The average number of staff at the companies included in the by the Hannover Re Group, with 1,337 (1,289) employed in consolidated financial statement of the Hannover Re Group Germany and 1,231 (1,245) working for the consolidated Group during the reporting period was 2,553 (2,475). As at the bal- companies abroad. ance sheet date altogether 2,568 (2,534) staff were employed

Personnel information N 92

2015 2014 31.3. 30.6. 30.9. 31.12. Average 31.12. Average Number of employees (excluding Board members) 2,550 2,548 2,564 2,568 2,553 2,534 2,475

Nationality of employees in 2015 N 93

German USA UK South Australian Swedish Irish Other Total African Number of employees 1,237 287 169 146 95 95 47 492 2,568

Expenditures on personnel The expenditures on insurance business, claims expenses (claims settlement) and expenditures on the administration of investments include the following personnel expenditures:

Personnel expenditures N 94

in EUR thousand 2015 2014 Annual financial statements a) Wages and salaries 246,391 224,659 246,391 224,659 b) Social security contributions and expenditure on provisions and assistance ba) Social security contributions 23,037 21,290 bb) Expenditures for pension provision 25,430 22,816 bc) Expenditures for assistance 4,784 4,616 53,251 48,722 Total 299,642 273,381

8.5 Earnings per share and dividend proposal

Calculation of the earnings per share N 95

2015 2014 Group net income in EUR thousand 1,150,725 985,649 Weighted average of issued shares 120,597,026 120,596,954 Basic earnings per share in EUR 9.54 8.17 Diluted earnings per share in EUR 9.54 8.17

The earnings per share is calculated by dividing the net income Neither in the year under review nor in the previous reporting attributable to the shareholders of Hannover Rück SE by the period were there any dilutive effects. weighted average number of shares outstanding within the period under review.

Hannover Re | Annual Report 2015 231 The weighted average of the issued shares was, as in the previ- There were no other extraordinary components of income ous year, slightly lower than the value of the shares in circula- which should have been recognised or disclosed separately in tion on the balance sheet date. In the context of the employee the calculation of the earnings per share. share option plan Hannover Re acquires treasury shares and sells them at a later date to eligible employees. The weighted The earnings per share could potentially be diluted in future average number of shares does not include 12,922 (21,608) through the issue of shares or subscription rights from the treasury shares pro rata temporis for the duration of the hold- authorised or conditional capital. ing period. For further details please see our comments in Sec- tion 6.13 “Shareholders’ equity and treasury shares”.

Dividend per share A dividend of EUR 512.5 million (EUR 361.8 million) was paid dividend of EUR 1.50 per share should be paid for the 2015 in the year under review for the 2014 financial year. financial year. This corresponds to a total distribution of EUR 572.8 million. The dividend proposal does not form part It will be proposed to the Annual General Meeting on 10 May of this consolidated financial statement. 2016 that a dividend of EUR 3.25 per share as well as a special

8.6 Lawsuits

Member companies of the Hannover Re Group are involved in may prove not to be accurate as the proceedings in question judicial and supervisory procedures as well as in arbitration continue to progress. This is also true of procedures for which proceedings as part of the conduct of insurance and reinsur- no provisions were established. Insofar as a commitment exists ance business. Depending upon the subject matter of the pro- under such procedures as at the balance sheet date that may cedure, the Hannover Re Group sets aside provisions for the possibly but will probably not result in a loss, the Hannover Re amount in dispute in such proceedings – for the most part in Group estimates this potential loss – where practicable – and the technical account and in exceptional cases as a charge to reports a contingent liability. For estimation purposes Han- other income and expenses – if and to the extent that the result- nover Re takes into account a number of factors. These include, ing commitments are likely to materialise and their amount among others, the nature of the claim, the status of the proce- can be estimated with sufficient accuracy. The provision estab- dure concerned, decision of courts and arbitration bodies, prior lished in each case covers the expense that can be expected settlement discussions, experience from comparable cases as in our assessment as at the balance sheet date. well as expert opinions and the assessments of legal advisers and other experts. If a provision has been established for a Neither the outcome nor the duration of pending procedures particular procedure, a contingent liability is not recognised. can be definitively foreseen at the time when provisions are established. The final liabilities of Hannover Re may diverge The lawsuits pending in the year under review and as at the considerably from the constituted provisions because the balance sheet date were not material for the Hannover Re Group assessment of probability and the quantification of these either individually or combined. Furthermore, no contingent lia- uncertain liabilities in large measure require estimates that bilities from lawsuits were to report as at the balance sheet date.

8.7 Contingent liabilities and commitments

Hannover Rück SE has secured by subordinated guarantee capital market rates applicable at the interest payment dates the subordinated debts issued by Hannover Finance (Luxem- (floating rates), the maximum undiscounted amounts that can bourg) S.A. in the 2010 and 2012 financial years in amounts of be called cannot be estimated with sufficient accuracy. Han- EUR 500.0 million each. A subordinated debt issued in 2005 nover Rück SE does not have any rights of recourse outside by Hannover Finance (Luxembourg) S.A. with a volume of the Group with respect to the guarantee payments. EUR 500.0 million, which was also secured by a subordinated guarantee, was redeemed on 1 June 2015 at the first sched- As security for technical liabilities to our US clients, we have uled call date. established two trust accounts (master trust and supplemental trust) in the United States. They amounted to EUR 3,511.5 mil- The guarantees given by Hannover Rück SE for the subordi- lion (EUR 3,173.7 million) and EUR 27.2 million (EUR 24.4 mil- nated debts attach if the issuer fails to render payments due lion) respectively as at the balance sheet date. The securities under the bonds. The guarantees cover the relevant bond vol- held in the trust accounts are shown as available-for-sale umes as well as interest due until the repayment dates. Given investments. In addition, we furnished further collateral the fact that interest on the bonds is partly dependent on the to ceding companies in an amount of EUR 1,810.3 million

232 Hannover Re | Annual Report 2015 (EUR 979.1 million) in the form of so-called “single trust funds”. As security for liabilities in connection with participating inter- This amount includes a sum equivalent to EUR 1,281.2 million ests in real estate companies and real estate transactions the (EUR 329.1 million) which was furnished by investors as secu- usual collateral under such transactions has been furnished to rity for potential reinsurance obligations from ILS transactions. various banks, the amount of which totalled EUR 592.7 million (EUR 574.3 million) as at the balance sheet date. As part of our business activities we hold collateral available outside the United States in various blocked custody Outstanding capital commitments with respect to alternative accounts and trust accounts, the total amount of which in rela- investments exist on the part of the Group in an amount of tion to the Group’s major companies was EUR 2,775.8 million EUR 837.1 million (EUR 716.3 million). These primarily involve (EUR 2,694.0 million) as at the balance sheet date. as yet unfulfilled payment obligations from investment commitments given to private equity funds and venture capital firms. The securities held in the blocked custody accounts and trust accounts are recognised predominantly as available-for-sale The application of tax regulations may not have been resolved investments. at the time when tax items are brought to account. The calculation of tax refund claims and tax liabilities is based on what As security for our technical liabilities, various financial insti- we consider to be the regulations most likely to be applied in tutions have furnished sureties for our company in the form of each case. The revenue authorities may, however, take a dif- letters of credit. The total amount as at the balance sheet date fering view, as a consequence of which additional tax liabilities was EUR 3,064.6 million (EUR 2,899.1 million). The standard could arise in the future. market contractual clauses contained in some of the underlying letter of credit facilities regarding compliance with stipulated Hannover Re enters into contingent liabilities as part of its conditions are explained in greater detail in the “Financial posi- normal business operations. A number of reinsurance trea- tion” section of the management report, page 59 et seq., on ties concluded by Group companies with outside third parties the information pursuant to § 315 Para. 4 German Commercial include letters of comfort, guarantees or novation agreements Code (HGB) as well as in Section 6.12 “Debt and subordinated under which Hannover Rück SE guarantees the liabilities of capital” on other financial facilities. the subsidiary in question or enters into the rights and obligations of the subsidiary under the treaties if particular con- In addition, we put up own investments with a book value of stellations materialise. EUR 57.9 million (EUR 78.9 million) as collateral for existing derivative transactions. We received collateral with a fair value Annual financial statements of EUR 6.9 million (EUR 12.9 million) for existing derivative transactions.

8.8 Long-term commitments

Several Group companies are members of the association for one of the other pool members failing to meet its liabilities, the reinsurance of pharmaceutical risks and the association an obligation exists to take over such other member’s share for the insurance of German nuclear reactors. In the event of within the framework of the quota participation.

8.9 Rents and leasing

Leased property

Future leasing commitments N 96

in EUR thousand Payments 2016 10,828 2017 8,334 2018 7,282 2019 5,684 2020 5,184 Subsequent years 7,940

Hannover Re | Annual Report 2015 233 Operating leasing contracts produced expenditures of EUR 10.8 million (EUR 9.3 million) in the year under review.

Rented property Altogether, non-cancellable contracts will produce the rental income shown below in subsequent years:

Rental income N 97

in EUR thousand Payments to be received 2016 87,568 2017 80,398 2018 71,910 2019 65,928 2020 59,314 Subsequent years 117,727

Rental income totalled EUR 87.8 million (EUR 76.2 million) in the year under review. The rental income resulted principally from the renting out of properties by the Group’s real estate companies.

8.10 Fee paid to the auditor

The appointed auditor of the consolidated financial statement AG). The expense recognised for the fees paid to KPMG AG of Hannover Re as defined by § 318 German Commercial Code and worldwide member firms of KPMG International (KPMG) (HGB) is KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG in the year under review can be broken down as follows:

Fee paid to the auditor N 98

2015 2014 KPMG thereof KPMG thereof in EUR thousand worldwide KPMG AG worldwide KPMG AG Services relating to auditing of the financial statements 7,124 1,603 6,271 1,415 Other assurance services 534 428 515 407 Tax consultancy services 614 152 882 460 Other services 3,253 3,242 1,462 1,411 Total 11,525 5,425 9,130 3,693

The auditor responsible for performance of the audit engage- is Mr. Florian Möller. He served as the engagement partner ment as defined by § 24a Para. 2 of the Professional Charter responsible for the audit of the annual and consolidated finan- for Accountants / Certified Auditors (Berufssatzung WP / VBP) cial statements for the first time as at 31 December 2015.

234 Hannover Re | Annual Report 2015 8.11 Events after the balance sheet date

No significant events occurred after the balance sheet date.

Hannover, 8 March 2016

Executive Board

Wallin Althoff Chèvre Gräber

Dr. Miller Dr. Pickel Vogel Annual financial statements

Hannover Re | Annual Report 2015 235 Auditors’ report

We have audited the consolidated financial statements pre- and legal environment of the Group and expectations as to pared by Hannover Rück SE, Hannover – comprising the possible misstatements are taken into account in the determi- consolidated balance sheet, consolidated income statement, nation of audit procedures. The effectiveness of the account- consolidated statement of comprehensive income, consolidated ing-related internal control system and the evidence supporting statement of changes in equity, consolidated cash flow state- the disclosures in the consolidated financial statements and ment and notes to the consolidated financial statements – as the combined management report are examined primarily well as the combined management report of the company and on a test basis within the framework of the audit. The audit the Group for the business year from 1 January to 31 Decem- includes assessing the annual financial statements of those ber 2015. The preparation of the consolidated financial state- entities included in consolidation, the determination of enti- ments and the combined management report in accordance ties to be included in consolidation, the accounting and con- with IFRS, as adopted by the EU, and the additional require- solidation principles used and significant estimates made by ments of German commercial law pursuant to § 315a Para. 1 management, as well as evaluating the overall presentation of HGB are the responsibility of the parent company’s manage- the consolidated financial statements and combined management. Our responsibility is to express an opinion on the consol- ment report. We believe that our audit provides a reasonable idated financial statements and on the combined management basis for our opinion. report based on our audit. Our audit has not led to any reservations. We conducted our audit of the consolidated financial statements in accordance with § 317 HGB and German generally In our opinion, based on the findings of our audit, the consoli- accepted standards for the audit of financial statements prom- dated financial statements comply with IFRS, as adopted by the ulgated by the Institute of Public Auditors in Germany (IDW). EU, and the additional requirements of German commercial law Those standards require that we plan and perform the audit pursuant to § 315a Para. 1 HGB and give a true and fair view such that misstatements materially affecting the presentation of the net assets, financial position and results of operations of the net assets, financial position and results of operations of the Group in accordance with these requirements. The com- in the consolidated financial statements in accordance with bined management report is consistent with the consolidated the applicable financial reporting framework and in the com- financial statements and as a whole provides a suitable view bined management report are detected with reasonable assur- of the Group’s position and suitably presents the opportunities ance. Knowledge of the business activities and the economic and risks of future development.

Hannover, 8 March 2016

KPMG AG Wirtschaftsprüfungsgesellschaft

Jungsthöfel Möller Wirtschaftsprüfer Wirtschaftsprüfer

236 Hannover Re | Annual Report 2015 Responsibility statement

To the best of our knowledge, and in accordance with the management report includes a fair review of the development applicable reporting principles, the consolidated financial and performance of the business and the position of the Group, statements give a true and fair view of the assets, liabilities, together with a description of the principal opportunities and financial position and profit or loss of the Group, and the Group risks associated with the expected development of the Group.

Hannover, 8 March 2016

Executive Board

Wallin Althoff Chèvre Gräber

Dr. Miller Dr. Pickel Vogel Miscellaneous

Hannover Re | Annual Report 2015 237 Supervisory Board

Report of the Supervisory Board of Hannover Rück SE

In our function as the Supervisory Board we considered at and life & health reinsurance as well as a presentation from length during the 2015 financial year the position and devel- the Executive Board covering the profit expectations for the opment of the company and its major subsidiaries. We advised 2015 financial year and the operational planning for the 2016 the Executive Board on the direction of the company and mon- financial year. In addition, the Chairman of the Supervisory itored the management of business on the basis of written Board was constantly advised by the Chairman of the Execu- and verbal reports from the Executive Board. The Supervisory tive Board of major developments and impending decisions as Board of Hannover Rück SE held four regular meetings in order well as of the risk situation within the company and the Group. to adopt the necessary resolutions after appropriate discussion. All in all, we were involved in decisions taken by the Execu- All nine Supervisory Board members took part in each of the tive Board and assured ourselves of the lawfulness, regularity Supervisory Board meetings held in 2015. In addition, we were and efficiency of the company’s management as required by informed by the Executive Board in writing and orally about our statutory responsibilities and those placed upon us by the the course of business and the position of the company and company’s Articles of Association. the Group on the basis of the quarterly financial statements. The quarterly reports with the quarterly financial statements No audit measures pursuant to § 111 Para. 2 Sentence 1 Ger- and key figures for the Hannover Re Group constituted an man Stock Corporation Act were required in the 2015 finan- important source of information for the Supervisory Board. We cial year. received an analysis of the 2014 results in property & casualty

Key points of deliberation As in every year, we were regularly updated on the work of control and profit transfer agreement with International Insur- the Supervisory Board committees and given a description ance Company of Hannover SE was approved. Implementation of the major pending legal proceedings. We approved the of the Act on the Equal Participation of Women and Men in restructuring of a sizeable life portfolio with a simultaneous Leadership Positions in the Private Sector and the Public Sector expansion of the risk monitoring structures. In addition, we was also discussed and a corresponding resolution adopted. received extensive reports on the recognition, measurement In addition, the strategic approach of acquiring capital par- and development of mortality solutions business in the United ticipations in Lloyd’s syndicates as well as the realisation of a States and on the status of the Market Consistent Embedded portion of the hidden reserves in the equity participation held Value in life and health reinsurance relative to competitors. A in E+S Rückversicherung AG were discussed. With an eye to further key point of deliberation was the adoption of a reso- § 3 Para. 1 Sentence 3 of the Regulation on the Supervisory lution on the increase in the capital reserve at Hannover Life Law Requirements for Remuneration Schemes in the Insurance Re AG. In the annual review of the investment guidelines the Sector (VersVergV) the full Supervisory Board considered the granularity of the list of capital market products was revised. adequacy of the remuneration system for the members of the The review also centred on an increase in the real estate allo- Executive Board. The variable remuneration of the members cation including updating of the specifications regarding the of the Executive Board was defined on the basis of the find- real estate exposure. A report on the profitability of the use ings with respect to attainment of the respective targets for of inflation swaps years was also received and the bilateral the 2014 financial year. letter of credit facilities were discussed. The formation of a

Committees of the Supervisory Board Of the committees formed by the Supervisory Board within the The Finance and Audit Committee considered inter alia the meaning of § 107 Para. 3 German Stock Corporation Act, the consolidated annual and quarterly financial statements drawn Finance and Audit Committee met on four occasions and the up in accordance with IFRS and the corresponding individual Standing Committee met twice. The Chairman of the Super- financial statements of Hannover Rück SE drawn up in accord- visory Board updated the full Supervisory Board on the major ance with the German Commercial Code (HGB) and discussed deliberations of the committee meetings at its next meeting with the independent auditors their reports on these financial and provided an opportunity for further questions. statements. As in the previous year, an expert opinion on the

238 Hannover Re | Annual Report 2015 adequacy of the loss reserves in property and casualty rein- various resolutions to be adopted by the Supervisory Board, surance was noted, the retrocession structure of the Hannover including resolutions on the increase in the capital reserve at Re Group and the accumulated prefinancing volume in life Hannover Life Re AG and the realisation of a portion of the hid- reinsurance including a comparison of the expected return den reserves in the equity participation held in E+S Rückver- flows with the repayments actually made, the risk reports, sicherung AG. The Committee also received an explanation the compliance report and the report on adherence to Cor- of the capital market risks in life and health reinsurance and porate Governance principles were discussed and reports on considered various M&A projects. Furthermore, the options the major subsidiaries were received and considered. In addi- available to the company for capital market measures were tion, the Committee examined the investment structure and explored. As in the previous year, we were again updated on investment income – including the stress tests with regard the status of the approval procedure for the internal model. to the investments and their implications for net income and the equity base – and defined the audit concentrations for the The Standing Committee dealt among other things with the 2015 financial year. The Committee was provided with detailed adequacy of the system of remuneration for the members of reports on the current status and probable development of the the Executive Board and the determination of the variable subsidiary International Insurance Company of Hannover SE remuneration of the members of the Executive Board for the as well as on the recognition and measurement of the risk-ori- 2014 financial year on the basis of the findings with respect to ented book of US life reinsurance business acquired in 2009 attainment of their respective targets. In all these matters the from Scottish Re. In addition, an audit report was submitted by Committee drew up corresponding recommendations for the KPMG AG Wirtschaftsprüfungsgesellschaft on the calculation full Supervisory Board. of the intrinsic value creation (IVC). The Committee prepared

Corporate Governance The Supervisory Board once again devoted considerable atten- management defined in the German Corporate Governance tion to the topic of corporate governance. It considered the Code, the Supervisory Board decided not to comply with the various changes to the German Corporate Governance Code recommendations contained in Code Item 4.2.3 Para. 2 regard- (DCKG) as amended on 5 May 2015 and in this connection ing caps on the amount of variable compensation elements in specified a regular limit on the length of membership of the management board contracts, in Code Item 4.2.3 Para. 4 con- Supervisory Board. It also determined the differentiations that cerning a cap on severance payments in management board are required for the vertical comparison of remuneration pur- contracts, in Code Item 5.2 Para. 2 concerning the Chair of suant to Item 4.2.2 of the Code. In addition, the Supervisory the Audit Committee and in Code Item 5.3.2 concerning the Board received a report on the design of the remuneration independence of the Chair of the Audit Committee. Justifica- schemes pursuant to § 3 Para. 5 of the Regulation on the Super- tion for these divergences is provided in the Declaration of visory Law Requirements for Remuneration Schemes in the Conformity pursuant to § 161 German Stock Corporation Act Insurance Sector (VersVergV) as well as the compliance, inter- regarding compliance with the German Corporate Governance nal audit and risk reports. The procedure to evaluate the effi- Code, which is reproduced in this Annual Report as part of the ciency of the Supervisory Board’s activities on a regular basis Declaration on Corporate Governance. Further information on was adopted in accordance with Item 5.6 of the Code. Not- the topic of corporate governance is available on Hannover withstanding the high importance that the Supervisory Board Re’s website. attaches to the standards of good and responsible enterprise

Audit of the annual financial statements and consolidated financial statements The accounting, annual financial statements, consolidated the accounting of non-traditional contracts as well as scrutiny financial statements and the combined management report of the recognition and measurement of real estate. Along with Supervisory board were audited by KPMG AG Wirtschaftsprüfungsgesellschaft. the audit concentrations of the German Financial Reporting The Supervisory Board selected the auditor and the Chairman Enforcement Panel (DPR), the additional audit concentrations of the Supervisory Board awarded the audit mandate. The audi- defined by the European Securities and Markets Authority tor’s independence declaration was received. In addition to the (ESMA) also formed part of the scope of the audit. The man- usual tasks performed by the auditors, key points of focus in date for the review report by the independent auditors on the the audit were the representation of legal disputes and associ- interim financial report as at 30 June 2015 was also awarded ated litigation risks as well as the provision of consistent and again. The special challenges associated with the international transparent reporting on the most significant financial perfor- aspects of the audits were met without reservation. Since the mance indicators in the Group management report, together audits did not give rise to any objections KPMG AG Wirtschaft- with an examination of the consistent representation of life sprüfungsgesellschaft issued unqualified audit certificates. The and health reinsurance treaties in the individual and consoli- Finance and Audit Committee discussed the annual financial dated financial statements with an emphasis on process and statements and the combined management report with the

Hannover Re | Annual Report 2015 239 participation of the auditors and in light of the audit reports, We have examined and it informed the Supervisory Board of the outcome of its examination. The audit reports were distributed to all members a) the annual financial statements of the company, the of the Supervisory Board and scrutinised in detail – with the financial statements of the Hannover Re Group and the participation of the auditors – at the Supervisory Board meet- combined management report prepared by the Execu- ing held to consider the annual results. The auditors will also tive Board for the company and the Group, and be present at the Annual General Meeting. b) the report of the Executive Board pursuant to § 312 German Stock Corporation Act (Report on relations The report on the company’s relations with affiliated companies with affiliated companies) drawn up by the Executive Board has likewise been examined by KPMG AG Wirtschaftsprüfungsgesellschaft and given the – in each case drawn up as at 31 December 2015 – and have following unqualified audit certificate: no objections. Nor do we have any objections to the statement reproduced in the dependent company report. “Having audited the report in accordance with our professional duties, we confirm that The Supervisory Board thus concurred with the opinions of the auditors and approved the annual financial statements and the 1. its factual details are correct; consolidated financial statements; the annual financial state- 2. in the case of the transactions detailed in the report, the ments are thereby adopted. Our proposal regarding the appro- expenditure of the company was not unreasonably high.” priation of the disposable profit for 2015 is in accordance with that of the Executive Board.

Changes on the Supervisory Board and the Executive Board The composition of the Supervisory Board and its committees as well as of the Executive Board did not change in the year under review.

Word of thanks to the Executive Board and members of staff The very good result once again generated by Hannover Rück SE for the 2015 financial year was made possible by the exceptional performance of the Executive Board and the members of staff working for the company and the Group. The Super- visory Board would like to express its recognition and special appreciation to the Executive Board and all the employees for their efforts.

Hannover, 9 March 2016

For the Supervisory Board

Herbert K. Haas Chairman

240 Hannover Re | Annual Report 2015 Supervisory Board of Hannover Rück SE

Herbert K. Haas 1, 2, 4 Burgwedel Chairman Chairman of the Board of Management of Talanx AG Chairman of the Board of Management of HDI Haftpflichtverband der Deutschen Industrie V.a.G.

Dr. Klaus Sturany 1 Ascona, Switzerland Deputy Chairman Former member of the Executive Board of RWE AG

Wolf-Dieter Baumgartl 1, 2, 4 Berg Former Chief Executive Officer of Talanx AG and HDI Haftpflichtverband der Deutschen Industrie V.a.G.

Frauke Heitmüller 5 Hannover Employee

Otto Müller 5 Hannover Employee

Dr. Andrea Pollak 4 Vienna, Austria Independent management consultant

Dr. Immo Querner Celle Member of the Board of Management of Talanx AG Member of the Board of Management of HDI Haftpflichtverband der Deutschen Industrie V.a.G.

Dr. Erhard Schipporeit 2, 3 Hannover Member of various supervisory boards

Maike Sielaff 5 Burgwedel Employee Supervisory board 1 Member of the Standing Committee 2 Member of the Finance and Audit Committee 3 Independent financial expert on the Finance and Audit Committee 4 Member of the Nomination Committee 5 Staff representative

Details of memberships of legally required supervisory boards and comparable control boards at other domestic and foreign business enterprises are contained in the individual report of Hannover Rück SE.

Hannover Re | Annual Report 2015 241 Further information

Branch offices and subsidiaries of the Hannover Re Group abroad

Australia Bahrain Brazil

Hannover Life Re of Hannover ReTakaful B.S.C. (c) Hannover Rück SE Australasia Ltd Al Zamil Tower Escritório de Representação Level 7 17th Floor no Brasil Ltda. 70 Phillip Street Government Avenue Praça Floriano, 19 salas 1701 / 02 Sydney NSW 2000 Manama Center 305 CEP 20 031 050 Tel. +61 2 9251-6911 Manama Rio de Janeiro Fax +61 2 9251-6862 Tel. +973 1721-4766 Tel. +55 21 2217-9500 Managing Director & CEO: Fax +973 1721-4667 Fax +55 21 2217-9515 Gerd Obertopp Managing Director: Representative: Mahomed Akoob Jan Rössel Hannover Rueck SE Australian Branch Hannover Rueck SE The Re Centre, Level 21 Bahrain Branch Canada Australia Square Al Zamil Tower 264 George Street 17th Floor Hannover Rück SE Sydney NSW 2000 Government Avenue Canadian Branch G. P. O. Box 3973 Manama Center 305 220 Bay Street, Suite 400 Sydney NSW 2001 Manama Toronto, Ontario M5J 2W4 Tel. +61 2 9274-3000 Tel. +973 1721-4766 Tel. +1 416 867-9712 Fax +61 2 9274-3033 Fax +973 1721-4667 Fax +1 416 867-9728 General Manager – General Manager: General Manager: Property & Casualty: Mahomed Akoob Laurel E. Grant Michael Eberhardt Agent: International Insurance Company of Ross Littlewood Bermuda Hannover SE (Canadian Branch) 220 Bay Street, Suite 400, International Insurance Company of Hannover Life Reassurance Toronto, Ontario M5J 2W4 Hannover SE (Australian Branch) – Bermuda Ltd. Tel. +1 416 867-9712 Underwriting Office Victoria Place, 2nd Floor, Fax +1 416 867-9728 Level 12 31 Victoria Street Head of Canadian Branch: 20 Bond Street Hamilton, HM 10 Derek Spafford Sydney NSW 2000 P. O. Box 2373 Tel. +61 2 8373-7580 Hamilton, HM JX Fax +61 2 9274-3033 Tel. +1 441 295-2827 China Head of Branch: Fax +1 441 295-2844 Mark Fleiser Managing Director: Hannover Rück SE Chantal Cardinez Hong Kong Branch 2008 Sun Hung Kai Centre Hannover Re (Bermuda) Ltd. 20th Floor Victoria Place, 2nd Floor, 30 Harbour Road 31 Victoria Street Wanchai, Hong Kong Hamilton, HM 10 Tel. +852 2519-3208 Tel. +1 441 294-3110 Fax +852 2588-1136 Fax +1 441 296-7568 General Manager: President & CEO: Wilbur Lo Dr. Konrad Rentrup

242 Hannover Re | Annual Report 2015 Hannover Rück SE Ireland Malaysia Shanghai Branch Suite 701 – 703, Building 1, Hannover Re (Ireland) Limited Hannover Rueck SE Lujiazui Century Financial Plaza No. 4 Custom House Plaza, IFSC Malaysian Branch 729 South Yanggao Road Dublin 1 Suite 29-01 200127 Shanghai Tel. +353 1 633-8800 Integra Tower, The Intermark Tel. +86 21 2035-8999 Fax +353 1 633-8806 348 Jalan Tun Razak Fax +86 21 5820-9396 Managing Director L&H & CEO: 50400 Kuala Lumpur General Manager: Debbie O’Hare Tel. +60 3 2687-3600 Fook-Kong Lye Managing Director ASI: Fax +60 3 2687-3760 Kathrin Scherff General Manager: Rohan Kananathan Colombia Italy Hannover Rück SE Mexico Bogotá Oficina de Representación Hannover Re Services Italy S.r.l. Carrera 9 No. 77 – 67 Via Dogana, 1 Hannover Services (México) Floor 5 20123 Milan S. A. de C. V. Bogotá Tel. +39 02 8068-1311 German Centre Tel. +57 1 642-0066 Fax +39 02 8068-1349 Oficina 4-4-28 Fax +57 1 642-0273 Head of Administration: Av. Santa Fé No. 170 General Manager: Giorgio Zandonella-Golin Col. Lomas de Santa Fé Miguel Guarin C.P. 01210 México, D.F. Tel. +52 55 9140-0800 Japan Fax +52 55 9140-0815 France General Manager: Hannover Re Services Japan Guadalupe Covarrubias Hannover Rück SE Hakuyo Building, 7th Floor Succursale Française 3 – 10 Nibancho 33 Avenue de Wagram Chiyoda-ku South Africa 75017 Paris Tokyo 102-0084 Tel. (Life & Health) Tel. +81 3 5214-1101 Compass Insurance Company Limited +33 1 4561-7300 Fax +81 3 5214-1105 KPMG Wanooka Place Tel. (Property & Casualty) General Manager: Ground Floor +33 1 4561-7340 Takayuki Ohtomo St. Andrews Road Fax +33 1 4006-0225 Parktown Managing Director: Johannesburg 2193 Raphaël Rimelin Korea P. O. Box 37226 Birnam Park 2015 Hannover Rück SE Tel. +27 11 745-8333 India Korea Branch Fax +27 11 745-8444 Room 414, 4th Floor www.compass.co.za Hannover Re Gwanghwamoon Officia Building Managing Director: Consulting Services 92, Saemunan-ro, Jongno-gu Paul Carragher India Private Limited Seoul 110-999 C&B Square Tel. +82 2 3700-0600 Hannover Life Reassurance Sangam Complex Fax +82 2 3700-0699 Africa Limited Unit 502, 5th Floor General Manager: Hannover Re House Andheri-Kurla Rd, Frank Park Cnr Hillside & Empire Roads Andheri (East) Parktown, Johannesburg 2193 Mumbai 400059 P. O. Box 85321 Tel. +91 22 6138-0808 Emmarentia 2029 Fax +91 22 6138-0810 Tel. +27 11 481-6500 General Manager: Fax +27 11 484-3330 / 32 GLN Sarma Managing Director: Wesley Clay Further information

Hannover Re | Annual Report 2015 243 Hannover Reinsurance International Insurance Company of USA Africa Limited Hannover SE (Scandinavian Branch) Hannover Re House Hantverkargatan 25 Hannover Life Reassurance Cnr Hillside & Empire Roads P. O. Box 22085 Company of America Parktown, Johannesburg 2193 10422 Stockholm 200 South Orange Avenue

P. O. Box 85321 Tel. +46 8 617-5400 Suite 1900 Emmarentia 2029 Fax +46 8 617-5590 Orlando, Florida 32801 Tel. +27 11 481-6500 Managing Director: Tel. +1 407 649-8411 Fax +27 11 484-3330 / 32 Thomas Barenthein Fax +1 407 649-8322 Managing Director: President & CEO: Randolph Moses Peter R. Schaefer Taiwan Hannover Reinsurance Office Charlotte Group Africa (Pty) Ltd. Hannover Rück SE 13840 Ballantyne Corporate Place, Hannover Re House Taipei Representative Office Suite 400 Cnr Hillside & Empire Roads Rm. 902, 9F, No. 129, Sec. 3 Charlotte, North Carolina 28277 Parktown, Johannesburg 2193 Minsheng E. Road Tel. +1 704 731-6300 P. O. Box 85321 Taipeh Fax +1 704 542-2757 Emmarentia 2029 Tel. +886 2 8770-7792 President & CEO: Tel. +27 11 481-6500 Fax +886 2 8770-7735 Peter R. Schaefer Fax +27 11 484-3330 / 32 Representative: Managing Director: Ryan Chou Office Denver Achim Klennert 1290 Broadway, Suite 1600 Denver, Colorado 80203 United Kingdom Tel. +1 303 860-6011 Spain Fax +1 303 860-6032 Hannover Re UK Life Branch President & CEO: HR Hannover Re, 10 Fenchurch Street Peter R. Schaefer Correduría de Reaseguros, S.A. London EC3M 3BE Paseo del General Martínez Tel. +44 20 3206-1700 Office New York Campos 46 Fax +44 20 3206-1701 112 Main Street 28010 Madrid Managing Director: East Rockaway, New York 11518 Tel. +34 91 319-0049 Stuart Hill Tel. +1 516 593-9733 Fax +34 91 319-9378 Fax +1 516 596-0303 General Manager: Hannover Services (UK) Limited President & CEO: Eduardo Molinari 10 Fenchurch Street Peter R. Schaefer London EC3M 3BE Tel. +44 20 7015-4290 Hannover Re Services USA, Inc. Sweden Fax +44 20 7015-4001 500 Park Blvd., Suite 805 Managing Director: Itasca, Illinois 60143 Hannover Rück SE, Nick Parr Tel. +1 630 250-5517 Tyskland Filial Fax +1 630 250-5527 Hantverkargatan 25 International Insurance Company General Manager: P. O. Box 22085 of Hannover SE (UK Branch) Eric Arnst 10422 Stockholm 10 Fenchurch Street Tel. +46 8 617-5400 London EC3M 3BE Fax (Life & Health) Tel. +44 20 7015-4000 +46 8 617-5597 Fax +44 20 7015-4001 Fax (Property & Casualty) Managing Director: +46 8 617-5593 Nick Parr Managing Director: Thomas Barenthein

244 Hannover Re | Annual Report 2015 opportunity cost rate for the shareholders’ equity consists of Glossary three components – a risk-averse interest rate, a market-specific risk loading and an enterprise-specific risk assessment, Accumulation loss: sum of several individual losses incurred the beta coefficient. The cost of shareholders’ equity is thereby various policyholders as a result of the same loss event (e. g. fore defined as follows: risk-averse interest rate + beta * enter- windstorm, earthquake). This may lead to a higher loss for the prise-specific risk assessment. direct insurer or reinsurer if several affected policyholders are insured by the said company. Cash flow statement: statement on the origin and utilisation of cash and cash equivalents during the accounting period. It Acquisition cost, deferred (DAC): cost of an insurance com- shows the changes in liquid funds separated into cash flows pany that arises from the acquisition or the renewal of an from operating, investing and financing activities. insurance contract (e. g. commission for the closing, costs of proposal assessment and underwriting etc.). Capitalisation Cedant: direct insurer or reinsurer which passes on (also: results in a distribution of the cost over the duration of the cedes) shares of its insured or reinsured risks to a reinsurer in contract. exchange for premium.

Aggregate excess of loss treaty: a form of excess of loss treaty Cession: transfer of a risk from the direct insurer to the reinsurer . reinsurance under which the reinsurer responds when a ceding insurer incurs losses on a particular line of business during a Claims and claims expenses: sum total of paid claims and specific period (usually 12 months) in excess of a stated amount. provisions for loss events that occurred in the business year; this item also includes the result of the run-off of the provi- Alternative risk financing: use of the capacity available on sions for loss events from previous years, in each case after the capital markets to cover insurance risks, e. g. through the the deduction of own reinsurance cessions. securitisation of natural catastrophe risks. Coinsurance Funds Withheld (CFW) Treaty: type of coinsur- American Depositary Receipt (ADR): share certificates written ance contract where the ceding company retains a portion of by US banks on foreign shares deposited there. The ADRs are the original premium at least equal to the ceded reserves. Simi- traded instead of the foreign shares. In the United States Han- lar to a Modco contract the interest payment to the reinsurer nover Re has enabled trading on the OTC (over-the-counter) reflects the investment return on an underlying asset portfolio. market through an ADR Level 1 program. New capital cannot be raised and the ADR is not listed on a US exchange under a Combined ratio: sum of the loss ratio and expense ratio. Level 1 program. The main advantage of an ADR Level 1 program compared to higher-level programs is that there is no Confidence (also: probability) level: the confidence level requirement for accounting or financial reporting in accord- defines the probability with which the defined amount of risk ance with US GAAP. will not be exceeded.

Basic losses: Losses that occur frequently in a foreseeable Contribution margin accounting level 5 (DB 5): this level amount, i. e. where the underlying risks are associated with of contribution margin accounting constitutes the clear profit relatively high probabilities of occurrence and usually low loss after earning the discounted claims expenditure plus all exter- amounts. nal and internal costs including the cost of capital.

Benefit reserves: value arrived at using mathematical methods Corporate Governance: serves to ensure responsible manage- for future liabilities (present value of future liabilities minus ment and supervision of enterprises and is intended to foster present value of future incoming premiums), primarily in life the trust of investors, clients, employees and the general pub- and health insurance. lic in companies.

Block assumption transaction (BAT): proportional reinsur- Critical illness coverages: cf. dread disease coverages ance treaty on a client’s life or health insurance portfolio, by means of which it is possible, inter alia, for our clients to real- DB 5: cf. contribution margin accounting level 5 ise in advance the future profits so as to be able to efficiently ensure the attainment of corporate objectives, e. g. in the areas Deposit accounting: an accounting method originating in US of financial or solvency policy. accounting principles for the recognition of short-term and multi-year insurance and reinsurance contracts with no signif- Capital asset pricing model (CAPM): the CAPM is used to icant underwriting risk transfer. The standard includes inter explain the materialisation of prices / returns on the capital alia provisions relating to the classification of corresponding market based on investor expectations regarding the future contract types as well as the recognition and measurement of Further information probability distribution of returns. Under this method, the a deposit asset or liability upon inception of such contracts.

Hannover Re | Annual Report 2015 245 Deposits with ceding companies / deposits received from Expense ratio: administrative expenses (gross or net) in rela- retrocessionaires (also: funds held by ceding companies / tion to the (gross or net) premium earned. funds held under reinsurance treaties): collateral provided to cover insurance liabilities that a (re-)insurer retains from Exposure: level of danger inherent in a risk or portfolio of the liquid funds which it is to pay to a reinsurer under a rein- risks; this constitutes the basis for premium calculations in surance treaty. In this case, the retaining company shows a reinsurance. deposit received, while the company furnishing the collateral shows a deposit with a ceding company. Facultative reinsurance: participation on the part of the re insurer in a particular individual risk assumed by the direct Derivatives, derivative financial instruments: these are finan- insurer. This is in contrast to obligatory (also: treaty) cial products derived from underlying primary instruments reinsurance. such as equities, fixed-income securities and foreign exchange instruments, the price of which is determined on the basis of Fair value: price at which a financial instrument would be an underlying security or other reference asset. Notable types freely traded between two parties. of derivatives include swaps, options and futures. Financial Solutions: refers to reinsurance transactions which – Direct business: business focused on narrowly defined port- in addition to the transfer of biometric risks – also include folios of niche or other non-standard risks. financing components. They generally employ the future profits contained in a block of new or inforce business to enable a Direct (also: primary) insurer: company which accepts risks ceding company to achieve a desired financial objective. Such in exchange for an insurance premium and which has a direct reinsurance solutions provide direct insurers with an alterna- contractual relationship with the policyholder (private individ- tive means of accessing capital in order, for example, to pursue ual, company, organisation). new lines of business or increase capital reserves.

Discounting of loss reserves: determination of the present Funds held by ceding companies / funds held under reinsur- value of future profits through multiplication by the corre- ance treaties: cf. deposits with ceding companies /deposits sponding discount factor. In the case of the loss reserves this received from retrocessionaires is necessary because of the new profit calculation methods for tax purposes applicable to German joint-stock corporations. Goodwill: the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities Diversification: orientation of business policy towards various assumed. revenue streams in order to minimise the effects of economic fluctuations and stabilise the result. Diversification is an instru- Gross / Retro / Net: gross items constitute the relevant sum total ment of growth policy and risk policy for a company. deriving from the acceptance of direct insurance policies or reinsurance treaties; retro items constitute the relevant sum Dread disease (also: critical illness) coverages: personal rid- total deriving from own reinsurance cessions. The difference ers on the basis of which parts of the sum insured which would is the corresponding net item (gross – retro = net, also: for otherwise only become payable on occurrence of death are own account). paid out in the event of previously defined severe illnesses. Hybrid capital: debt structure which because of its subordina- Earnings per share, diluted: ratio calculated by dividing the tion bears the character of both debt and equity consolidated net income (loss) by the weighted average number of shares outstanding. The calculation of the diluted earn- IBNR (Incurred but not reported) reserve: provision for ings per share is based on the number of shares including claims which have already occurred but which have not yet subscription rights already exercised or those that can still been reported. be exercised. Impairment: extraordinary amortisation taken when the pres- Earnings retention: non-distribution of a company’s profits ent value of the estimated future cash flow of an asset is less leading to a different treatment for tax purposes than if prof- than its book value. its were distributed. Inflation swap: derivative financial instrument to hedge infla- Excess of loss treaty: cf. non-proportional reinsurance tion risks, under which a fixed cash flow is swapped for a variable cash flow dependent on the inflation trend. Excess return on capital allocated (xRoCA): describes the IVC in relation to the allocated capital and shows the relative excess return generated above and beyond the weighted cost of capital.

246 Hannover Re | Annual Report 2015 International Securities Identification Number (ISIN): Loss ratio: proportion of loss expenditure (gross or net) rela- ten-character universal code used to identify securities inter- tive to the (gross or net) premium earned. nationally. It is prefixed by a country code that specifies the country where the issuer entity is legally registered or in which Major loss: loss which has special significance for the direct it has legal domicile, e. g. DE = Germany. insurer or reinsurer due to the amount involved; it is defined as a major loss in accordance with a fixed loss amount or other Intrinsic value creation (IVC): the IVC is calculated accord- criteria (in the case of Hannover Re more than EUR 10 million ing to the following formula: real operating value creation = gross). adjusted operating profit (EBIT) – (capital allocated x weighted cost of capital). IVC is a tool of value-based enterprise manage- Major loss budget: modelled loss expectancy for business with ment used to measure the accomplishment of long-term targets natural perils exposure with respect to net losses larger than on the level of the Group, the individual business groups and EUR 10 million plus the average of the past 10 years for man- the operating units (profit centres). made net losses larger than EUR 10 million.

Investment grade: investment grade ratings are awarded to Mark-to-market valuation: the evaluation of financial instru- companies and assigned to securities that have a low risk pro- ments to reflect current market value or fair value. file. They contrast with non-investment-grade ratings, which by definition include speculative elements and therefore entail Matching currency cover: coverage of technical liabilities in a significantly higher risk. foreign currencies by means of corresponding investments in the same currency in order to avoid exchange-rate risks. IVC: cf. Intrinsic Value Creation Modified Coinsurance- (Modco) treaty: type of reinsurance Issuer: private enterprise or public entity that issues securi- treaty where the ceding company retains the assets with ties, e. g. the federal government in the case of German Treas- respect to all the policies reinsured and also establishes and ury Bonds and a joint-stock corporation in the case of shares. retains the total reserves on the policies, thereby creating an obligation to render payments to the reinsurer at a later date. Leader: if several (re-)insurers participate in a contract, one Such payments include a proportional share of the gross pre- company assumes the role of leader. The policyholder deals mium plus a return on the assets. exclusively with this lead company. The lead (re-)insurer normally carries a higher percentage of the risk for own account. Morbidity risk: in general terms, the actuarial risk that a person receiving health, disability or long-term-care benefits trig- Letter of credit (LOC): bank guarantee; at the request of the gered by illness, malfunctioning of body parts, injury or frailty guaranteed party, the bank undertakes to render payment to experiences a higher or longer than expected morbidity or dis- the said party up to the amount specified in the LOC. This ability leading to a higher payment amount, higher frequency method of providing collateral in reinsurance business is typ- or longer duration. ically found in the USA. Mortality risk: in general terms, the actuarial risk that a per- Life and health (re-)insurance: collective term for the lines son upon whose death a benefit is payable lives shorter than of business concerned with the insurance of persons, i. e. life, expected. From a (re)insurer’s perspective, this is the risk that pension, health and personal accident insurance. the observed mortality experience in an underlying portfolio deviates from what had previously been calculated on the basis Life business: this term is used to designate business activities of actuarial assumptions. in our life and health reinsurance business group. Net: cf. Gross / Retro / Net Longevity risk: in general terms, the actuarial risk that a person receiving regular living benefits – such as annuities or Non-proportional reinsurance: reinsurance treaty under which pensions – lives longer than expected. the reinsurer assumes the loss expenditure in excess of a particular amount ( priority) (e. g. under an excess of loss Loss, economic: total loss incurred by the affected economy treaty). This is in contrast to proportional reinsurance. as a whole following the occurrence of a loss. The economic loss must be distinguished from the insured loss. Obligatory (also: treaty) reinsurance: reinsurance treaty under which the reinsurer participates in a cedant’s total, precisely Loss, insured: the insured loss reflects the total amount defined insurance portfolio. This is in contrast to facultative of losses covered by the insurance industry (insurers and reinsurance. reinsurers). Further information

Hannover Re | Annual Report 2015 247 Other securities, available-for-sale: securities that cannot be Probability level: cf. confidence level clearly allocated to the “trading” or “held-to-maturity” portfolios; these securities can be disposed of at any time and are Property & Casualty business: by way of distinction from oper- reported at their fair value at the balance sheet date. Changes ations in our Life & Health reinsurance business group, we use in fair value are not recognised in the statement of income. this umbrella term to cover our business group comprised essentially of property and casualty reinsurance, specialty lines Other securities, held-to-maturity: investments in debt secu- and structured reinsurance products. rities that can and are intended to be held to maturity. They are measured at amortised cost. Property and casualty (re-)insurance: collective term for all lines of business which in the event of a claim reimburse only Other securities, trading: securities that are held principally the incurred loss, not a fixed sum insured (as is the case in life for short-term trading purposes. They are measured at their and personal accident insurance, for example). This principle fair value at the balance sheet date applies in all lines of property and casualty insurance.

(Insurance) Pool: a risk-sharing partnership under civil law Proportional reinsurance: reinsurance treaties on the basis of formed by legally and economically independent insurers and which shares in a risk or portfolio are reinsured under the reinsurers in order to create a broader underwriting base for relevant direct insurer’s conditions. Premiums and losses particularly large or unbalanced risks. The members under- are shared proportionately on a pro-rata basis. This is in con- take to write certain risks only within the scope of the insur- trast to non-proportional reinsurance. ance pool. They include such risks – while maintaining their commercial independence – in the insurance pool against a Protection cover: protection of segments of an insurer’s port- commission fee. Each insurer participates in the profit or loss folio against major losses (per risk / per event), primarily on a of the insurance pool according to its proportionate interest. non-proportional basis. Reinsurance is often ceded or accepted in order to further diversify the risk. Pools can be divided into two types: coin- Provision: liability item as at the balance sheet date to dis- surance pools, in which all members take the role of primary charge obligations which exist but whose extent and / or due insurers according to their interests, and reinsurance pools, date is / are not known. Technical provisions, for example, are in which a primary insurer writes the risks and then spreads for claims which have already occurred but which have not yet them among the participating insurers by way of reinsurance. been settled, or have only been partially settled (= provision for outstanding claims, abbreviated to: claims provision). Portfolio: a) all risks assumed by an insurer or reinsurer in a defined sub-segment (e. g. line of business, country) or in Provision for unearned premiums (also: unearned premium their entirety; b) group of investments defined according to reserve): premiums written in a financial year which are to be specific criteria. allocated to the following period on an accrual basis. This item is used to defer written premiums. Premium: agreed remuneration for the risks accepted from an insurance company. Unlike the earned premiums, the written Purchase cost, amortised: the cost of acquiring an asset premiums are not deferred. item including all ancillary and incidental purchasing costs; in the case of wasting assets less scheduled and / or special Present value of future profits (PVFP): intangible asset pri- amortisation. marily arising from the purchase of life and health insurance companies or portfolios. The present value of expected future Quota share reinsurance: form of proportional reinsurance profits from the portfolio assumed is capitalised and amortised under which the reinsurer assumes a contractually set percent- according to schedule. age share of the written risk. Since the insurer is responsible for acquisition, pricing, policy administration and claims han- Price earnings ratio (PER): a valuation ratio of a company’s dling, the administrative expenditure for the reinsurer is very share price compared to its per-share earnings. low. The latter therefore participates in the aforementioned expenses through payment of a reinsurance commission. This Primary insurer: cf. direct insurer commission can amount to 15% to 50% of the original premium depending upon the market and cost situation. Priority: direct insurer’s loss amount stipulated under non-proportional reinsurance treaties; if this amount is Rate: percentage rate (usually of the premium income) of exceeded, the reinsurer becomes liable to pay. The priority the reinsured portfolio which is to be paid to the reinsurer may refer to an individual loss, an accumulation loss or the as reinsurance premium under a non-proportional reinsur- total of all annual losses. ance treaty.

248 Hannover Re | Annual Report 2015 Reinsurer: company which accepts risks or portfolio segments Surplus reinsurance: form of proportional reinsurance under from a direct insurer or another reinsurer in exchange for which the risk is not spread between the insurer and reinsurer an agreed premium. on the basis of a previously agreed, set quota share. Instead, the insurer determines a maximum sum insured per risk up to Reserve ratio: ratio of (gross or net) technical provisions to which it is prepared to be liable. Risks that exceed the ceding the (gross or net) premiums. company’s retention (surpluses) are borne by the reinsurer. The reinsurer’s lines thus vary according to the level of the Retention: the part of the accepted risks which an insurer / rein- retention and the sum insured of the reinsured contract. The surer does not reinsure, i. e. shows as net (retention ratio: reinsurer’s liability is generally limited to a multiple of the ced- percentage share of the retention relative to the gross written ing company’s retention. premiums). Surplus relief treaty: a reinsurance contract under which a Retrocession (also: Retro): ceding of risks or shares in risks reinsurer assumes (part of) a ceding company’s portfolio in which have been reinsured. Retrocessions are ceded to other order to relieve strain on the insurer’s policyholders’ surplus. reinsurers in exchange for a pro-rata or separately calculated premium (cf. Gross / Retro / Net). Survival ratio: reflects the ratio of loss reserves to paid losses under a specific contract or several contracts in a balance sheet Risk, insured: defines the specific danger which can lead to year. the occurrence of a loss. The insured risk is the subject of the insurance contract. Technical result: balance of income and expenditure allocated to the insurance business and shown in the technical state- Securitisation instruments: innovative instruments for trans- ment of income. ferring reinsurance business to the capital markets with the goal of refinancing or placing insurance risks. Treaty reinsurance: cf. obligatory reinsurance

Segment reporting: presentation of items in the balance sheet Underwriting: process of examining, accepting or rejecting and income statement split according to functional criteria such (re-)insurance risks and classifying those selected in order to as business sectors and regions. charge the proper premium for each. The purpose of underwriting is to spread the risk among a pool of (re-)insureds in Spread loss treaty: treaty between an insurer and a reinsurer a manner that is equitable for the (re-)insureds and profitable that covers risks of a defined portfolio over a multi-year period. for the (re-)insurer.

Structured entity: entity with specific characteristics not Unearned premium reserve: cf. provision for unearned bound to a particular legal form that is used to conduct premiums closely defined activities or to hold assets and for which the traditional concept of consolidation – based on voting rights – Value of in-force business (VIF): present value of expected is often inadequate for determining who exercises control over future profit flows from the portfolio of in-force retained busi- the entity. ness, discounted by a currency-specific risk discount rate. It is determined in accordance with local accounting principles. Structured products: reinsurance with limited potential for profits and losses; the primary objective is to strive for xRoCA: cf. Excess Return on Capital Allocated risk equalisation over time and to stabilise the cedant’s balance sheet.

Structured reinsurance: reinsurance with limited potential for profits and losses. In most cases customers strive for risk equalisation over time or solvency relief, both of which have a stabilising effect on the ceding company’s balance sheet. Further information

Hannover Re | Annual Report 2015 249 List of graphs, tables and charts

I Introductory Sections M Management Report N Notes

I Introductory Sections

I 01 Gross premium inside front cover 2 I 09 Highs and lows of the Hannover Re share 10 I 02 Group net income (loss) inside front cover 2 I 10 Relative performance of the Hannover Re share 11 I 03 Policyholders’ surplus inside front cover 2 I 11 Shareholding structure as at 30 November 2015 12 I 04 Book value per share inside front cover 2 I 12 Geographical breakdown of the shares held by I 05 Dividend inside front cover 2 institutional investors 12 I 06 Key figures inside front cover 3 I 13 Basic information 13 I 07 The Group worldwide inside front cover 4 I 14 Key figures 13 I 08 Strategic business groups inside front cover 4 I 15 Performance Excellence 19

M Management Report

M 01 Target attainment 24 M 19 Property & Casualty reinsurance: Breakdown of gross M 02 System of value-based management: written premium in worldwide treaty reinsurance 44 Performance Excellence (PE) combines M 20 Key figures for Life & Health reinsurance 47 the strategic and operational levels 25 M 21 Breakdown of gross premium by markets 48 M 03 Intrinsic Value Creation and excess return M 22 Value of New Business (VNB) growth 48 on capital allocated 26 M 23 Breakdown of gross written premium by M 04 Gross premium by business group 33 reporting categories 48 M 05 Business development in the year under review 35 M 24 EBIT-margin per reporting category M 06 Gross written premium in P& reinsurance 36 vs. target margins 2015 48 M 07 Geographical breakdown of gross written premium M 25 Investment income 52 in 2015 36 M 26 Investment income 52 M 08 Breakdown of proportional and non-proportional M 27 Investment portfolio 53 treaties by volume 36 M 28 Breakdown of investments under own management 54 M 09 Breakdown into business written through brokers M 29 Rating of fixed-income securities 54 and direct business 36 M 30 Capital structure as at 31 December 2015 55 M 10 Key figures for Property & Casualty reinsurance 37 M 31 Development of policyholders’ surplus 56 M 11 Property & Casualty reinsurance: Major loss trend 38 M 32 Development of Group shareholders’ equity 56 M 12 Property & Casualty reinsurance: Key figures M 33 Amortised cost of our subordinated bonds 57 for individual markets and lines in 2015 39 M 34 Consolidated cash flow statement 58 M 13 Property & Casualty reinsurance: Breakdown of M 35 Cash flow from operating activities 58 gross written premium in target markets 39 M 36 Financial strength ratings of the Hannover Re Group 58 M 14 Property & Casualty reinsurance: Breakdown of M 37 Financial strength ratings of subsidiaries 59 gross written premium in North America by line M 38 Issue ratings of issued debt 59 of business 40 M 39 Condensed profit and loss account of M 15 Property & Casualty reinsurance: Breakdown of Hannover Rück SE 60 gross written premium in Continental Europe M 40 Hannover Rück SE: Breakdown of gross premium by line of business 40 by individual lines of business 61 M 16 Property & Casualty reinsurance: Breakdown of M 41 Balance sheet structure of Hannover Rück SE 63 gross written premium in worldwide specialty lines 41 M 42 Staff turnover / absenteeism Hannover Home Office 65 M 17 Property & Casualty reinsurance: Breakdown of M 43 Breakdown of employees by country 66 gross written premium in facultative reinsurance 43 M 44 Resources consumed at Hannover Home Office 69 M 18 Property & Casualty reinsurance: Breakdown of M 45 Implementation of strategy 72 gross written premium in global reinsurance 43 M 46 Strategic targets for risk position 73

250 Hannover Re | Annual Report 2015 M 47 Solvency II: Hannover Re is prepared 74 M 69 Required risk capital for operational risks 93 M 48 Available capital and required risk capital 75 M 70 Opportunity management process 97 M 49 Central functions of risk monitoring and steering 77 M 71 Measurement basis and payment procedures M 50 Reconciliation (economic capital / for fixed remuneration 104 shareholders’ equity) 80 M 72 Overview of the composition of variable M 51 Required risk capital 81 remuneration 105 M 52 Risk landscape of Hannover Re 82 M 73 Measurement bases / conditions of payment M 53 Required risk capital for underwriting risks for variable remuneration 106 in property and casualty reinsurance 83 M 74 Payment procedures for the total variable M 54 Required risk capital for the four largest natural remuneration 108 hazards scenarios 83 M 75 Total remuneration of the active members of the M 55 Survival Ratio in years and reserves for asbestas- Executive Board pursuant to DRS 17 related claims and pollution damage 84 (amended 2010) 110 M 56 Stress tests for natural catastrophes after M 76 Total expense for share-based remuneration retrocessions 84 of the Executive Board 112 M 57 Limit and threshold for the 200-year aggregate M 77 German Corporate Governance Code, annual loss as well as utilisation thereof 84 Item 4.2.5 Para. 3 – Table 1 (target / minimum / M 58 Catastrophe losses and major claims in 2015 85 maximum remuneration as nominal amounts) 114 M 59 Ensuring the quality of our portfolios 85 M 78 German Corporate Governance Code, M 60 Combined and catastrophe loss ratio 86 Item 4.2.5 Para. 3 – Table 2 (cash allocations M 61 Required risk capital for underwriting risks in 2014 and 2015) 116 in life and health reinsurance 86 M 79 Defined benefit commitments 119 M 62 Required risk capital for market risks 87 M 80 Defined contribution commitments 119 M 63 Utilisation of the trigger system 88 M 81 Individual remuneration received by the members M 64 Value at Risk for the investment portfolio of the of the Supervisory Board 120 Hannover Re Group 88 M 82 Group of participants and total number of eligible M 65 Scenarios for changes in the fair value of participants in variable remuneration systems 122 material asset classes 89 M 83 Growth in gross domestic product (GDP) 126 M 66 Rating structure of our fixed-income securities 90 M 84 Property & Casualty reinsurance: M 67 Gross written premium retained 91 Forecast development for 2016 128 M 68 Reinsurance recoverables as at the M 85 Life & Health reinsurance: balance sheet date 92 Forecast development for 2016 131

N Notes

N 01 Consolidated balance sheet as at 31 December 2015 136 N 15 Maturities of the fixed-income and variable-yield N 02 Consolidated statement of income 2015 138 securities 177 N 03 Consolidated statement of comprehensive N 16 Amortised cost, unrealised gains and losses and income 2015 139 accrued interest on the portfolio of investments N 04 Consolidated statement of changes in classified as held to maturity as well as shareholders’ equity 2015 140 their fair value 2015 178 N 05 Consolidated cash flow statement 2015 142 N 17 Amortised cost, unrealised gains and losses and N 06 Further IFRS Amendments and Interpretations 148 accrued interest on the portfolio of investments N 07 Valuation models 150 classified as held to maturity as well as N 08 Key exchange rates 155 their fair value 2014 178 N 09 Scope of consolidation 159 N 18 Amortised cost, unrealised gains and losses and N 10 List of shareholdings 160 accrued interest on loans and receivables N 11 Book values from business relations with as well as their fair value 2015 179 unconsolidated structured entities 2015 168 N 19 Amortised cost, unrealised gains and losses and N 12 Book values from business relations with accrued interest on loans and receivables unconsolidated structured entities 2014 169 as well as their fair value 2014 179 N 13 Consolidated segment report as at N 20 Amortised cost, unrealised gains and losses and 31 December 2015 172 accrued interest on the portfolio of investments N 14 Investments 176 classified as available for sale as well as their fair value 2015 180 Further information

Hannover Re | Annual Report 2015 251 N 21 Amortised cost, unrealised gains and losses and N 58 Effect on the defined benefit obligation 206 accrued interest on the portfolio of investments N 59 Other liabilities 207 classified as available for sale as well as N 60 Development of sundry non-technical provisions 208 their fair value 2014 181 N 61 Maturities of the sundry non-technical provisions 208 N 22 Fair value of financial assets at fair value through N 62 Debt and subordinated capital 2015 209 profit or loss before and after accrued interest as N 63 Debt and subordinated capital 2014 210 well as accrued interest on such financial assets 181 N 64 Maturities of financial liabilities 2015 210 N 23 Carrying amounts before impairment 182 N 65 Maturities of financial liabilities 2014 211 N 24 Rating structure of fixed-income securities 2015 183 N 66 Net gains and losses from dept and N 25 Rating structure of fixed-income securities 2014 183 subordinated capital 211 N 26 Breakdown of investments by currencies 2015 184 N 67 Subsidiaries with material non-controlling N 27 Breakdown of investments by currencies 2014 185 interests 213 N 28 Financial information on investments in N 68 Gross written premium 214 associated companies 186 N 69 Investment income 215 N 29 Investments in associated companies 186 N 70 Interest income on investments 215 N 30 Development of investment property 187 N 71 Net gains and losses on investments 2015 216 N 31 Fair value hierarchy of financial assets and N 72 Net gains and losses on investments 2014 216 liabilities recognised at fair value 2015 189 N 73 Reinsurance result 217 N 32 Fair value hierarchy of financial assets and N 74 Other technical income 217 liabilities recognised at fair value 2014 189 N 75 Commissions and brokerage, change in N 33 Movements in level 3 financial assets and deferred acquisition costs 218 liabilities 2015 190 N 76 Other technical expenses 218 N 34 Movements in level 3 financial assets and N 77 Other income / expenses 218 liabilities 2014 190 N 78 Income tax 219 N 35 Income and expenses from level 3 financial N 79 Domestic / foreign breakdown of recognised assets and liabilities 2015 191 tax expenditure / income 219 N 36 Income and expenses from level 3 financial N 80 Deferred tax assets and deferred tax liabilities assets and liabilities 2014 191 of all Group companies 220 N 37 Fair value hierarchy of financial assets and N 81 Netting of deferred tax assets and deferred liabilities measured at amortised cost 2015 192 tax liabilities 220 N 38 Fair value hierarchy of financial assets and N 82 Reconciliation of the expected expense for liabilities measured at amortised cost 2014 192 income taxes with the actual expense 221 N 39 Development of deferred acquisition costs 193 N 83 Expiry of non-capitalised loss carry-forwards N 40 Age structure of overdue accounts receivable 193 and temporary differences 221 N 41 Value adjustments on accounts receivable 193 N 84 Maturity structure of derivative financial N 42 Development of goodwill 194 instruments 2015 223 N 43 Capitalisation rates 194 N 85 Maturity structure of derivative financial N 44 Other assets 195 instruments 2014 223 N 45 Development of the present value of future profits N 86 Netting agreements 2015 224 (PVFP) on acquired life reinsurance portfolios 195 N 87 Netting agreements 2014 224 N 46 Fixtures, fittings and equipment 196 N 88 Business assumed and ceded in Germany N 47 Development of other intangible assets 197 and abroad 226 N 48 Technical provisions 198 N 89 Stock appreciation rights of Hannover Rück SE 228 N 49 Loss and loss adjustment expense reserve 199 N 90 Share awards of Hannover Rück SE 230 N 50 Net loss reserve and its run-off in the property N 91 Development of the provision for share awards and casualty reinsurance segment 200 of Hannover Rück SE 230 N 51 Maturities of the technical reserves 2015 201 N 92 Personnel information 231 N 52 Maturities of the technical reserves 2014 201 N 93 Nationality of employees in 2015 231 N 53 Development of the benefit reserve 202 N 94 Personnel expenditures 231 N 54 Development of the unearned premium reserve 203 N 95 Calculation of the earnings per share 231 N 55 Measurement assumptions 204 N 96 Future leasing commitments 233 N 56 Movements in net liability from defined benefit N 97 Rental income 234 pension plans 205 N 98 Fee paid to the auditor 234 N 57 Provisions for pensions 206

252 Hannover Re | Annual Report 2015 Financial calendar 2016 / 2017

10 March 2016 Annual financial statements 2015 Annual Results Press Conference, Hannover Analysts’ Meeting, Frankfurt

10 May 2016 Interim Report 1 / 2016 Annual General Meeting Hannover Congress Centrum Theodor-Heuss-Platz 1 – 3 30175 Hannover, Germany

4 August 2016 Interim Report 2 / 2016

20 October 2016 19th international Investors’ Day, London

10 November 2016 Interim Report 3 / 2016

2 February 2017 Conference Call: Property and casualty treaty renewals

9 March 2017 Annual financial statements 2016 Annual Results Press Conference, Hannover Analysts’ Meeting, London

10 May 2017 Interim Report 1 / 2017 Annual General Meeting Hannover Congress Centrum Theodor-Heuss-Platz 1 – 3 30175 Hannover, Germany

10 August 2017 Interim Report 2 / 2017

19 October 2017 20th international Investors’ Day, Frankfurt

8 November 2017 Interim Report 3 / 2017 Further information

Hannover Re | Annual Report 2015 253 Contact information

Corporate Communications A printed version of the Hannover Re Group’s Annual Report is also available in German. The report can additionally be Karl Steinle accessed online in English and German as an HTML version Tel. + 49 511 5604-1500 and downloaded in PDF format. Fax + 49 511 5604-1648 This is a translation of the original German text; the German [email protected] version shall be authoritative in case of any discrepancies in the translation.

Media Relations We would also be pleased to send you copies of the Annual Reports of the Hannover Re Group and Hannover Rück SE in Gabriele Handrick English or German. Tel. + 49 511 5604-1502 If you wish to receive paper copies of any of these versions Fax + 49 511 5604-1648 please contact Corporate Communications on: [email protected] Tel. + 49 511 5604-2343 Fax + 49 511 5604-1648 or order them online at www.hannover-re.com under Investor Relations “Investors / Results and reports”.

Julia Hartmann Tel. + 49 511 5604-1529 Fax + 49 511 5604-1648 [email protected]

254 Hannover Re | Annual Report 2015 Imprint

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Published by Concept, design and realisation Hannover Rück SE Karl-Wiechert-Allee 50 Whitepark GmbH & Co., Hamburg 30625 Hannover, Germany www.whitepark.de Tel. +49 511 5604-0 Fax +49 511 5604-1188 www.hannover-re.com